Germany’s finance minister Wolfgang Schäuble has given Greece’s charismatic new prime minister Alexis Tsipras a clear warning: the Greek government must face up to reality soon enough. He should have added that Greece’s creditor nations can expect an unpleasant wake up call too.
Germany and its partners must abandon their illusions that Greece will continue as it is doing now, accepting credit in return for compulsory reforms. New lines of credit will in fact simply become transfers of cash. If the Greek government continues to be presented with the choice of plunging into financial chaos or receiving new credits in return for budgetary prescriptions, it will of course accept the credit and agree to any reforms the creditors ask. But it will have no intention of actually putting those reforms into practice. It has no mandate for that course of action.
The government was elected to end the assistance program. It is arrogant and naive to believe that Europe could change the country with far-reaching reforms against the will of the Greek population. Reforms must be implemented with the support of the Greek population and political system, or they will not work at all.
Does this mean that Greece must leave the euro zone? Europe is well-advised to use the coming four months to confer with Greece, outside the public’s earshot, about how a possible departure could be organized in a manner acceptable to all parties. But the principal focus should be on something else: instead of imposing further conditions on Greece and throwing good money after bad, the creditor nations should do the opposite in the future: make few suggestions for reform and provide even less money, preferably none at all. Is that a feasible option?
There will have to be negotiations over the loans that have already been paid out. The negotiating position of the creditor nations isn’t too bad. Greece receives net annual transfers of more than €4 billion from the budget of the European Union.
Greece is being awarded new loans at the expense of European taxpayers. To stop this, there must be limits imposed on cash withdrawals and transfers to accounts outside the Greek banking system.
Even if Greece decides to no longer service its debts, the European Central Bank could guarantee interest payments of around 2 percent on the €250 billion, or $276 billion, that Greece owes to other countries.
The more important question is: is it possible to avoid new loans? Three problems arise here. First, the Greek government must collect enough taxes to finance its ongoing expenditures without paying out on interest. It is not far from reaching this goal. In recent months, tax revenues have fallen, but the government is determined to collect tax, and it will not collapse if it keeps spending under control.
The second problem is the servicing of existing debts with private creditors. These total some €70 billion, a good 20 percent of the overall governmental debt. Of this sum, around €20 billion will fall due this year. If the creditors do not extend the terms loans, Greece has to unilaterally give itself an extension, because without the help of new credit assistance, the government would be unable to service these loans.
A significant chunk of the private loans comes from Greek banks. This leads to the third problem: the stability of the Greek banking system. In recent months, many bank customers have transferred money abroad or withdrawn cash. The gaps are being filled with liquidity assistance from the Greek Central Bank which, for its part, refinances itself with the ECB. This refinancing ultimately means that Greece is being awarded new loans at the expense of European taxpayers. To stop this, there must be limits imposed on cash withdrawals and transfers to accounts outside the Greek banking system. In other words, there must be capital-transaction controls.
These tough measures would bite hard. But Greece would be freed from externally imposed requirements and regular visits by the troika. The alternatives are worse. A departure from the euro zone would bring incalculable risks. But a continuation of the present policy is an equally unpalatable option. The rendezvous with reality will cause all parties to sober up, but it offers them the chance to proceed in new directions.
Clemens Fuest is president of the Center for European Economic Research. To contact him: email@example.com