Greece on the Razor's Edge

AP Photo/Thanassis Stavrakis

A pedestrian passes anti-austerity graffiti in front of Athens Academy on Thursday, January 29, 2015.

The morning after Alexis Tsipras’s Syriza coalition won the Greek elections in late January, an old friend called from Athens. He’d been a senior figure in the Papandreou government that had struggled for nearly two years to stave off the collapse of the Greek economy, so he knew firsthand just how deadly the chalice now about to be passed to Tsipras was.

He also knew Tsipras personally—Greece is a small country—as well as Yanis Varoufakis and other key figures who would be appointed to the new government. And he clearly understood what Tsipras aimed to do to quickly and decisively break “the golden shackles” that had bound Greeks in a crushing web of debt: face down the creditors. 

But my friend also knew firsthand the stubbornly conservative and judgmental consensus that had steadily solidified, not just among European elites but among a broader European public, that Greece needed to pay what it had borrowed—and needed to keep its agreements to reform. 

Tsipras had won not just because the European view of Greece as a morality play is manifestly unfair and humiliating to Greeks—an imposed burden, composed of equal parts harsh ideology and lousy technocratic advice—but also because most Greeks couldn’t fathom that view’s hold on their fellow Europeans, given the prolonged pain it had brought their country.

So we talked over the options we thought Tsipras would have in some detail, weighed the actors and their abilities, calculated the scenarios that would likely soon unfold. But as our conversation wound to a close, my friend said something that still rings painfully true, words I’ve replayed in my mind repeatedly these past agonizing weeks. 

“I fear,” he said simply, his voice flat and sad, “that Alexis is about to discover that yesterday was the best day of the rest of his life.”

Three months on, Greece’s economy is, once again, dancing at the edge of a financial and economic precipice—and Tsipras’s days have clearly gotten worse. The Greeks eerily seem to know what they’re facing, their creditors know it, the world knows it—yet the sense of urgency and the willingness to negotiate what’s needed to halt the fall over the edge just aren’t there. 

In Athens, the massive rallies that once filled Syntagma Square outside the Parliament have been replaced by ominous silence. Popular support still clings impressively to the new government—70 percent support it in some polls, twice what Syriza won in the elections. Few, however, are convinced Greece’s partners mean to negotiate a deal Greeks feel they can live with.

Meanwhile, across northern Europe, political parties on the right (predictably), the center (alarmingly), and the left (appallingly) have refused to pressure their creditor governments toward the debt write-down that’s the only plausible escape route left from Greece’s trap. The press consensus is barely better—an echo chamber of Europe’s Calvinism, with only a few voices calling for “restructuring”—the word “write-off” verboten. Meanwhile, the technocratic denizens of think tanks talk in terms of micro-adjustments that nowhere acknowledge how technocratic thinking has failed Europe (not just Greece) on a scale reminiscent of Versailles after World War I.

In 2010, Greece became the operating room for the largest financial “rescue” surgery in history. For several months that summer and fall, as the economy kept hemorrhaging jobs and output, millions of Greeks, from the prime minister on down, hung on, hoping that the International Monetary Fund, the European Central Bank, and Eurocrats in Brussels (the so-called “Troika” doctors in charge of the rescue surgery) knew what they were doing. After all, they were in charge, and swore that they could stop the bleeding—and then very, very slowly get the patient back on her feet.

They were wrong—and the patient, who kept bleeding, is now once again relapsing. 

The next likely step is that Greece, because the government is running out of money to pay all its wages and bills, will enter technical default fairly shortly and stop payments to its foreign creditors—most likely to the European Commission or the European Central Bank. 

By itself, this means little. (During negotiations in 2011, Greece entered technical default before striking a deal to “haircut” private bondholders.) But the missed payment will set in motion a series of cross-default clauses that could very quickly push Greece’s major banks toward their own defaults. Since Syriza took office, money has been rushing out of Greek banks at a rate not seen since the crisis first began in early 2010. And that bank run will only accelerate with the technical default, as depositors worry that the government may soon impose capital controls, limiting their rights to take out money from their accounts.

The impact of all this on Europe won’t be as bad as some predicted four years ago—a continent-wide meltdown just 18 months after Lehman’s collapse—because most of the money owed is now owed to governments or the central bank, and not to private banks, insurance companies, or hedge funds. But the result will do little to help the long-stalled recovery of the European economy.

If Greece’s technical default happens, there may finally be a deal struck—but don’t expect a miracle. There will be vagueness on crucial details, worded so that both sides could claim victory, with more months of micro-negotiations ahead. Lacking permanent solutions, investors predictably won’t invest, banks won’t lend, money will keep bleeding out of the country, and unemployment will stubbornly endure at levels not seen since the Great Depression. In other words, no clean resolution of anything seems at hand in this modern Greek tragedy.

Greek exit from the euro, of course, exists as the one “clean” option—but in much the same way that the patient’s suicide would represent a clean break from the travails of living. Abandoning the euro for a return to the drachma would likely leave Greece with a currency of half the purchasing power, in effect doubling the price of imported petroleum, of cars and trucks, of pharmaceuticals, and even food—on all of which Greece has long been dependent. The debt Greece owes in Euros—175 percent of its GDP—would double to 350 percent, and whatever the Troika members might do about collecting the money Athens owes them, the one certainty is that vulture funds that quietly bought up Greek debt for pennies on the dollar would drag Greece through years of costly litigation, just as they have Argentina.

There is, in short, little by way of a clear or simple path to solving this crisis, save the obvious, which has so far proved quixotically elusive: a massive write-down of governmental debt and a serious strengthening of Greece’s banking system that would pump in the liquidity needed to restart the country’s economic engine.

Greece’s economy today is barely 2 percent of Europe’s—and a major write-down of its debt, frozen but written off over many years, would amount to a tiny fraction of 1 percent of Europe’s economy each year. The price the continent would pay for this would be small, whereas the moral victory would be enormous, not just to 11 million suffering Greeks but also to Europe as a whole. Clearly, the bitterest lessons taught by the 20th century—that the quicksand of petty nationalism, stereotyping of the other, and contempt rather compassion for the vulnerable—should not pretend to be the ground of Europe’s future.

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