‘Miracle’ needed to keep Greece in the euro
Negotiations between the Greek government and its creditors have stalled, with a critical deadline for debt repayments approaching. As the two sides refuse to budge, are they bluffing?
Greek, European and global politicians and economists have fought for five years to avoid the prospect of ‘Grexit’: Greece leaving the euro. But their efforts may soon fail. EU finance ministers will meet in Brussels today knowing that the odds are against a deal; bookmakers are quoting the shortest-ever price on Greece changing currency. Other major issues are set to be relegated to mere sideshows.
On 30 June, Greece faces a deadline for the repayment of €1.6bn (£1.1bn) worth of loans to the International Monetary Fund (IMF). To pay the money, its government needs to reach a deal with the IMF, European Central Bank and European Commission to gain access to €7.2bn (£5.2bn) due from its bailout. But a settlement seems increasingly unlikely, as relations between the two are arguably more acrimonious than ever.
Greek Prime Minister Alexis Tsipras said on Tuesday that his country’s creditors were trying to ‘humiliate’ it and accused the IMF of ‘criminal responsibility’ for his people’s hardship. But the president of the European Commission, Jean-Claude Juncker — previously considered fairly moderate on the subject — responded that he had ‘sympathy for the Greek people but not the Greek government’.
The particular point of dispute is the demand from the creditors, led by German Chancellor Angela Merkel, for Greece to cut public sector pensions and raise VAT. They say the changes are essential to reassure them that Greece will be able to pay back its debts. Greece says it has already endured punishing austerity in recent years and that the only realistic solution can be relief of their debts.
A country leaving the European single currency would be unprecedented. It could lead to a flight of capital from Greece, leaving salaries unpaid and catastrophically depressed economic activity. Investors in other struggling eurozone countries would lose confidence as membership would be seen as reversible. And it could fuel social and political instability both in Greece and beyond.
To the brink
The Finnish prime minister says that a ‘miracle’ may now be needed to avert a disaster. The two sides have entirely different conceptions of what a solution looks like: one believes in the power of the market, the other that government services cannot be sacrificed. A debt default and exit from the euro are just a matter of time.
But commentators such as the Guardian’s Larry Elliott say that, in reality, they realise such an outcome is ‘unthinkable’. Tsipras and Merkel are engaging in some convincing brinkmanship to extract concessions from the other side, but they both know that a deal is a necessity. When the deadline comes, they will end up making some painful sacrifices.
- Will Greece and its creditors reach a deal?
- Is brinkmanship ever the right strategy to adopt at a time of crisis?
- Work in pairs, with one of you acting as Alexis Tsipras and the other as Angela Merkel. Write a dialogue of the conversation you might have as the deadline approaches.
- Prepare a presentation on the Greek debt crisis. Research its history, causes, settlements so far and the possible outcomes. Finish by giving your view on what the final resolution of the crisis will be and explain your opinion.
Some People Say...
“Greece will capitulate.”Megan Greene, Politico
What do you think?
Q & A
- Why does this matter to anyone who doesn’t live in Greece?
- Global finance is now so inter-connected that a rupture in one part of it inevitably affects it elsewhere. A country leaving the euro would draw in to question the whole point of the single currency and whether it can work in the long-term.
- What will Greece use as a currency if it leaves the euro?
- It will almost certainly return to using the drachma, which was the world’s oldest currency when Greece stopped using it in 2002.
- Are there any possible advantages to Greece leaving?
- The drachma could be devalued. This would hurt some industries but boost others which the Greeks rely on. Going on holiday to Greece might suddenly become much cheaper, giving its important tourism industry a much-needed boost.
- Other major issues
- The ministers will also discuss Britain’s demands for reforms of the union, new sanctions against Russia and the Mediterranean migrant crisis.
- Under deals reached so far, Greece has been promised €240bn in total to help it to stay in the euro, on the proviso that it needed to cut government spending and raise taxes.
- Cut public sector pensions
- This was particularly contentious early in the crisis, as Greece’s government pension scheme was seen as too generous. But main pensions have fallen almost 50% since 2010 and about 45% of Greek pensioners now receive less than the official poverty threshold.
- Raise VAT
- Greece’s government, which is led by the firmly left-wing party Syriza, strongly opposes VAT rises. They say it taxes the poorest because tax on essential items climbs at the same rate as tax on luxury goods.
- Greece has cut government spending from €11.1bn at the end of 2009 to €9.6bn at the end of 2014. Government workers’ salaries have fallen by 22%.
- Flight of capital
- People are likely to take money out of the country and businesses may leave.