Greece’s date with reality

The interim deal signed between cash-strapped Greece and Europe last month was largely interpreted as a victory for the European leadership. Germany’s finance minister Wolfgang Schäuble, a strong advocate of austerity policies, had even said the Greek government had been forced into a “date with reality”. This view was partly true, as the Greek government, led by the left-wing Syriza party, had made several u-turns to sign the deal.

The Syriza came to power in January on a strong anti-austerity campaign, and its leader, Prime Minister Alexi Tsipras, had vowed to liberate the country from the clutches of the so-called ‘troika’ (the European Central Bank, the European Commission and the IMF), which was supervising the policies of the previous Greek government.

According to the deal, the Eurozone has agreed to release another €7.2 billion in aid, but the country should continue the austerity policies, with the troika supervising the government’s policies.

Perils of austerity The fiscal tightening steps Greece implemented took a heavy toll. GDP has shrunk by 30 per cent since 2008, while unemployment is at 25.8 per cent, the highest in the Eurozone. Around 60 per cent of the country’s youth are jobless, while 2.5 million people live below the poverty line.

As part of the bailout deal, the previous Greek government had imposed savage cuts in public services, wages of government workers and social benefits. This is what economist Paul Krugman calls “an economic and human nightmare”. Attempts to pay down debt through austerity have been unsuccessful, as the depression in the economy has badly hit the government’s tax revenue, crippling its capacity to make payments. Greece’s debt to GDP ratio was 156.9 per cent at the end of 2012; it rose to 174.9 per cent by December 31, 2013.

Why then did the Syriza government still go for a compromise? Firstly, it didn’t get much time to prepare a credible, workable Plan B. Tsipras took charge as prime minister only weeks before the bailout talks started in Brussels. Secondly, the government was facing a serious problem of capital flight. Greeks had been withdrawing cash from the nation’s banks at the rate of about €500 million a day. Banks were already on a lifeline from the ECB. Thirdly, Athens failed to deploy its most important strategic weapon — the threat to exit the currency zone. Had Greece said it preferred a Grexit over status quo , the balance of power on the negotiation table would have changed. Despite assurances from euro leadership and ratings agencies that the impact of a Grexit would be minimal, a direct threat from Athens would certainly have had ripple effects.

Next move But the February 20 deal hasn’t broken the stand-off. So far, the EU hasn’t released the promised €7.2 billion aid to Athens, saying the country has to come up with “credible” reforms. Greece has promised to deliver a list of reforms by Monday, but the list will have to be vetted by bailout inspectors. On the other hand, the government will face stiff opposition from within the party if it completely gives in to the EU pressure. The immediate challenge is that Athens faces a €1.7 billion bill for wages and pensions at the end of the month and then a €450 million loan payment to the IMF on April 9. Economists at Deutsche Bank predicted earlier this week that Greece will run out of funds by then, forcing the country to default on payments if the funds are not released. The bigger challenge is that even if the funds are released, the crisis will not be solved. The EU has promised loans only till June, and by that time Athens will have to come back to Brussels to stay afloat.

If austerity continues to deepen the humanitarian crisis, both the government and the public will be forced to ask: Will exiting the Eurozone and defaulting on payments be a better option than continuing the status quo at the mercy of European institutions? National defaults in recent history would tell the Greeks that long-term gains follow short-term pain if the post-default scenario is managed properly. That would be Greece’s real date with reality. Europe’s, too.

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