Greece crisis

Rules Not Made to be Broken

Greece says No Source AP
The Greeks voted "no," which makes a Grexit inevitable, according to our author.
  • Why it matters

    Why it matters

    The euro zone risks losing its credibility if it keeps lowering the bar for Greece, the author argues.

  • Facts

    Facts

    • Greece owes its international creditors €240 billion, the next payment of €3.5 billion is due on July 20.
    • Capital controls are in place in Greece but as the banks run out of money, further measures will be needed.
    • European leaders will meet today to try and reach a deal to keep Greece in the euro zone.
  • Audio

    Audio

  • Pdf

The Greek referendum is a lesson for us all.

Nearly two-thirds of the Greek population refused the austerity and reform program demanded by the country’s international creditors. The reaction to all attempts so far to economically restructure the over-indebted country could hardly have been clearer.

The Greeks’ clear “No,” this loud call for more autonomy and against the interference of European partners has to be respected.  

Of course, the decision makes negotiations about a third bailout practically impossible. Greece is so far removed from the ideas of the other euro countries that it is hard to imagine how a Grexit can be avoided.

What Greece’s Prime Minister Alexis Tsipras hailed as a “victory of democracy” could prove to be a fatal mistake. The country’s European partners now know that Greece clearly rejects a continuation of the bailout policies pursued up to now.  

That is understandable in view of the fact that two bailout programs amounting to around €250 billion have not been able to solve the country’s crisis.  

In that respect, the creditors, especially Chancellor Angela Merkel, should also be asking themselves what mistakes have been made handling the Greek crisis over the last five years.

It is audacious of Mr. Tsipras to interpret the referendum as a clear mandate for him to negotiate a better bailout program for his country.

Perhaps it was an illusion right from the beginning that a country without either a functioning political system, a modern tax administration or a competitive economy could prosper inside the euro zone. 

It was certainly a mistake not to combine cuts in the Greek budget with a broadly-based growth program. The attempt to make the Greek economy more competitive mainly by cutting wages was clearly not enough.

These mistakes should not be underestimated. At the same time, it is audacious of Mr. Tsipras to interpret the referendum as a clear mandate for him to negotiate a better bailout program for his country. 

It is quite obviously just the latest attempt by the Greek head of government to dictate the terms of more billions in loans to his European creditors. Over the last few days, Mr. Tsipras has repeatedly shown what he has in mind – an end of austerity and a substantial reduction of debts.  

But these demands are so at odds with the basic principle of the European bailout logic, to provide community assistance only if reforms are implemented, that the gap between the negotiating partners is as big as ever.

The German chancellor and the heads of the other euro-zone countries know that they risk the credibility of the currency union if they make further concessions in the fiscal rules for Greece. 

On top of this, there’s the Greek government’s blatant breach of faith vis-à-vis its international creditors, calling them dictators, blackmailers and terrorists. In such an atmosphere, the inclination for heads of government – not just Chancellor Merkel –  to sell a further bailout package to their respective national parliaments is at an all-time low.

An honest and consistent reaction to the referendum in Greece is to set the wheels in motion for a Grexit. The challenges in Greece are so immense that a recovery of the country inside the euro zone now appears impossible.  

That doesn’t mean that an exit of Greece from the currency union also signals the end of the euro partners’ support. On the contrary, even outside the currency union, Greece will continue to need billions in aid to prevent a humanitarian catastrophe in the middle of Europe.  

New funds will also be needed to prevent the Greek banks going bankrupt and to promote growth industries. The survival program for Greece outside the euro zone will be expensive and the adaptation process for the Greeks in the coming years certainly hard.  

But in the long term, a currency union can only function if all member countries follow the agreed rules, keep their economies competitive, implement all necessary reforms and so contribute to a strong euro.

The referendum has shown that a majority of the Greeks is currently not prepared to do this.  

A Grexit is therefore inevitable.  

 

To contact the author: afhueppe@handelsblatt.com

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