Opinion, Berkeley Blogs

The humiliation of Greece and Tsipras's fatal mistake

By Gérard Roland

A large part of Europe is still shell-shocked by the “compromise” that was decided in the Sunday, July 12 Eurozone marathon. Without repeating the list of reforms imposed on Greece, they are much harsher than what had been negotiated weeks and months before, even harsher than anything imposed on Greece since the beginning of the crisis. Whereas a few days before, debt relief for Greece was in sight, this was taken off the table. If Greece is to stay in the Euro, only further austerity and misery are to be expected. How did we get there?

Syriza was elected because of the Great Depression imposed on Greece by its creditors since 2010. The new Greek government had a mandate to alleviate the Greek debt, but also to stay within the Euro. Eurozone governments and Finance Ministers, Schaüble, Dijsselbloem et al. were dismayed. Greek voters had had the bad taste of electing a leftist government. That this election was the result of the extremely harsh austerity imposed on Greece did not seem to sink in.

Greek flag The new Greek government was told that contracts are sacred and that they had the duty to implement the promises signed by the previous Greek government. This was of course unacceptable to the newly elected Greek government. Negotiations went nowhere after months of discussion. Then Tsipras came up with the referendum on the latest Eurozone proposal. This ended the negotiations for a week until the end of the referendum. The ECB’s Emergency Liquidity Assistance to Greek banks was strongly reduced, forcing Greek banks to close. The Eurozone countries and the Greek opposition presented the "No" as a vote in favor of Grexit, which Greeks did not and do not want. This blackmail did not work and the "No" still won, with over 60%.

Tsipras then showed the will to come back to the table of negotiations. In the meantime, the deadline for extension of the second bailout program had expired and Greece failed to make a payment to the IMF. Angela Merkel was the first to react to the victory of the "No," saying that conditions were not present to start a negotiation on a third bailout program and that Greece had to make a proposal.

Tsipras, with the help of the French, made a proposal to the Eurogroup that was hardly different from the Eurozone proposal that Greek voters had rejected. This seemed like a smart tactic. Indeed, by making a proposal similar to what the Eurozone had proposed, this was a way of bringing debt relief on the table, something the Greeks had asked since Syriza’s electoral victory. Indeed, the Greek proposal was met with positive remarks. Lagarde, Tusk, Juncker and others started talking about the need to associate this Greek proposal with debt relief. It looked like the referendum had given Tsipras a new mandate against austerity and that his willingness to compromise should bring the Eurozone to agree on debt relief in exchange for reforms.

Nightmare scenario

Things started looking good for Tsipras, but then things turned to a nightmare. On Saturday, July 11, at the Eurogroup meeting of Finance Ministers, Schaüble and Finance ministers from nine other countries rejected outright the Greek proposal and insisted on a much harsher list of reforms. At the same time, while not being officially discussed, a paper by Schaüble circulated, invoking the possibility of a Grexit “for five years." Indeed, it appeared that there was a push to exclude Greece from the Euro. There was no consensus on that position and the debate was brought to the heads of state.

We know the outcome. Monday morning, Tsipras accepted the much harsher austerity conditions in order to avoid a Grexit. Debt relief was still excluded. This was a clear capitulation, because Tsipras was now accepting a proposal that was much harsher than what was rejected by a large majority of Greeks in the referendum. Tsipras courageously took responsibility for this defeat and managed to pass Wednesday night through the Greek Parliament the list of measures the Eurozone had been asking for.

What went wrong? Tsipras’s fatal mistake is that no preparations had been made for Grexit. The reason was that this is not an option that was ever desired by the Tsipras government. They thought that since Grexit would be catastrophic for everybody inside the Eurozone, it was not credible. The support in the referendum should show the support of Greek voters and help increase the bargaining position of Greece.

This lack of preparation is the weakness that was exploited by Schaüble. Once it was clear, that Germany and most of the partisans of austerity were ready to exclude Greece from the Euro, basically by getting the ECB to cut funding to Greek banks, it would have been a catastrophe of major proportions for the Greek economy. Truly, there was a large risk for the Euro, but by showing readiness to exclude Greece from the Eurozone, Tsipras literally had a gun to his head, and had no other choice but to capitulate.

The credible threat of Grexit is what did him in. If Greece had made serious preparations and was ready to weather a Grexit, things would have been completely different. The threat of exclusion would not seem that terrible to the Greeks, whereas the risk of Grexit to the Eurozone would seem much more serious. The threat of Grexit would then have seemed less credible. To me, this is the fatal mistake that Tsipras made. Overall, he was still able to push the bad agreement through the Greek Parliament. Germany now looks very bad to the outside world and Greeks look like victims, but are likely to go through a terrible time as their economy is further strangled.

What next?

Where do we go from here? Tensions inside the Eurozone have become stronger than ever. Popular indignation against austerity policies is increasing, especially in countries that have suffered most from them. But overall, people are becoming more and more disgusted with Europe as it is. In Germany and parts of Northern Europe, recriminations against Greece are getting stronger and stronger. Many people think the Greeks should have been kicked out of the Euro.

The hardliners inside the Eurogroup do not trust Greece to implement the harsh policies it has signed up for. They do not feel Schadenfreude, but feel cheated by the Greeks. The fact that Tsipras said he was forced to sign the agreement in order to avoid Grexit is seen by them as proof that he does not want to implement the measures imposed on him.

In reality, we are at a dead end. The Greek debt is clearly unsustainable; there is not in Greece the state capacity to implement many of the austerity measures agreed on; the privatization part of the deal is a terrible idea, since prices of privatized assets can only be extremely low, and the whole program amounts to a spoliation of Greek public wealth. Moreover, the Greek economy is set to continue a vicious spiral of depression, deficit, further austerity and depression. This cannot and should not continue.

Maybe there will be substantial debt relief after all for Greece, and maybe there could then be a set of measures that would bring growth back. Even in this optimistic scenario, the European dream has been tarnished to such a degree that it is hard to imagine how things can be repaired.

At best, there should be deep reforms to reduce the democratic deficit inside Europe and have a fiscal policy comparable to the U.S. federal policy. This is probably not going to happen. Nationalism is flaring up everywhere and European solidarity is at a low point.

The pessimistic scenario looks more likely at this stage. Grexit has been avoided for a few weeks or months, but the Greeks will be pushed out when it appears that austerity does not work. The Greeks will of course be blamed for it. This will lead to deep divisions inside Europe that will almost certainly lead to its breakup into several pieces, sooner or later.

Germany will then, for a third time in a century, have wrought havoc on the European continent. All that only because of its misguided economic ideas, because they have not learned the lessons from the Great Depression and the murderous follies that followed.