For months, Greece has been attempting to change the eurozone through brinkmanship
Greek Prime Minister Alexis Tsipras speaking at an economic forum in St. Petersburg, Russia, on June 19. PHOTO: ALEXANDER ZEMLIANICHENKO/ASSOCIATED PRESS
For five months, the Greek government has been attempting to change the nature of the eurozone through brinkmanship. Prime Minister Alexis Tsipras was elected on a promise that he could keep Greece in the eurozone while embarking on a major expansion of public spending. The only way he could hope to fulfill this promise was by forcing the rest of the eurozone to abandon its rules-based approach to bailouts and instead cough up the cash to fund his giveaways with minimal conditions.
Officials charged by Greece’s creditors with working through the complex technical details necessary to satisfy taxpayers—not only in the eurozone but also among many of the poorest countries in the world that stand behind the International Monetary Fund—that their money was not being wasted, say that from the start, he refused to engage seriously with them.
Normally, loans involving billions of euros of aid would be backed up by bulging files covering everything from implementation plans to draft legislation. Yet remarkably, these officials say that even on the eve of a crisis summit that could set in train events that could lead to Greece’s eurozone exit, little of this preparatory work has been done on even some of the least contentious reforms.
Instead, Athens has gambled that eurozone governments would ultimately be forced into a panicky “political” deal under the twin pressures of a market meltdown and overwhelming domestic sympathy for Greece from austerity-weary eurozone electorates.
It is now clear that Athens miscalculated. The markets have refused to melt down, thanks partly to the European Central Bank’s well-timed January decision to launch a large-scale major government bond-buying program; even as anxious Greeks removed about €1 billion ($1.13 billion) from their bank accounts on Friday, Portuguese government bond yields fell.
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Meanwhile, eurozone governments are under no domestic political pressure to yield to Athens. The most vocal international support for Mr. Tsipras’s Syriza party has come from a curious alliance of American Keynesian economists and British euroskeptics with no skin in the game and many with axes to grind.
Among eurozone policy makers, sympathy for the real hardships suffered by many Greeks is tempered by the knowledge that other peripheral countries that stuck with their bailout programs are now among the eurozone’s fastest growing; indeed, last year Greece’s program appeared to be working too. The economy grew in 2014, unemployment fell, the government ran a budget surplus before interest payments and investors poured billions into Greek government bonds and bank equity. Greece’s Finance Minister Yanis Varoufakis recently claimed the crisis would only be over when Greece regained access to financial markets. On that score, Greece’s crisis was over in 2014.
Besides, Greece’s creditors do not believe they are making impossible demands. They have already reduced Greece’s medium-term budget surplus target before interest costs to 3.5% of gross domestic product and given Athens an extra two years to hit it. The fiscal targets now being demanded by Greece’s creditors are similar to those proposed by Mr. Varoufakis in January.
They also believe that reforms to the pension system which have proved the key sticking point in the negotiations are essential to enable Greece to hit this target.
The problem is not just that the system is unsustainable, requiring the state to make good an annual deficit equivalent to 10% of GDP which must be funded by crippling taxes on the productive economy and damaging cuts to public services; the bigger problem is that in many schemes, contribution rates bear no relation to payouts and that the system is full of perverse incentives. A poorly-designed top-up payment encourages low-paid workers to cease contributions after 15 years. Without reform, the pension system will continue to place an intolerable burden on the productive economy and younger generations.
Of course, there are different ways of addressing these anomalies and Greece’s creditors don’t necessarily agree on the best way forward. Some European Commission officials would be happy to see reforms to the controversial supplementary payments to low-paid pensioners delayed as part of a comprehensive welfare reform, while the IMF believes it should be tackled immediately.
The creditors have also told Athens that many of the proposed pension savings could be achieved via increased contribution rates and higher charges for other services such as health insurance rather than nominal pension cuts. Yet the creditors have now been waiting in vain for five months for Athens to deliver its own alternative proposals as to how to fill the funding gap, leading some officials to conclude that Athens isn’t serious about reform.
Now the time has run out. At Monday’s meeting of eurozone leaders, Mr. Tsipras will be confronted by a take it or leave it deal, based largely on the one proposed by creditors two weeks ago. The best that he can expect is a more explicit commitment to restructure Greece’s debt burden than the one he has already been given in private.
But this carrot of future debt relief sufficient to satisfy the International Monetary Fund’s debt sustainability rules will be accompanied by the implicit stick of restrictions on the Greek banking system’s access to emergency central bank liquidity facilities, which in turn will lead inevitably to the imposition of capital controls. While some eurozone policy makers believe that even at this point a deal may be possible, others believe it would lead to a euro exit.
Yet the irony is that Mr. Tsipras’s campaign to force the eurozone to change may yet be successful. At a second summit on Thursday, eurozone leaders will discuss a long-awaited report by the European Union’s top officials on how to deepen the eurozone’s integration and stabilize the currency union to ensure both that individual countries are better able to absorb shocks and that the cost of shocks is spread more evenly.
The report, drafted by European Commission President Jean-Claude Juncker in collaboration with the Presidents of the European Council, ECB, European Parliament and Eurogroup will call for the creation of a common bank deposit guarantee fund by the end of 2017 and a common eurozone Treasury by the end of 2025. It’s an undoubtedly ambitious plan that Mr. Tsipras may have unwittingly given the eurozone the political impetus to embrace.
Out of the ashes of the Greek crisis, a more robust eurozone may yet emerge. The question for Mr. Tsipras: will Greece be part of it?
Write to Simon Nixon at simon.nixon@wsj.com
