Greek debt tragedy an indictment of euro zone’s response to the crisis

The Irish Times –It is four and a half months since Alexis Tsipras and his party Syriza swept to power in Greece on a wave of optimism but the country remains in a stand-off with international lenders.

The Greek government’s decision to defer a €300 million IMF repayment on Friday was likely a negotiating ploy to increase pressure on lenders rather than an indication of Greece’s inability to pay. What is clear though is Greece does not have the funds to pay the cumulative €1.5 billion due to the IMF on June 30th.

Greece is in serious financial trouble.

Billions of euro are flowing out of Greek banks each month and the ECB is keeping the banks afloat with more than €80 billion in emergency cash. The country’s bond yields have soared, making a return to private markets impossible, and the government has already raided the cash reserves of local authorities to pay public-sector wages and pensions.

In Brussels, the talk among the many Greek nationals who work at the various European institutions is all about the bailout. One Greek EU official approaching retirement age says she would like to retire in the next few years but can’t afford to – she sends home money to family members each month. “My salary is not just sustaining me, three other people are depending on it,” she says.

As Greece once again faces into the abyss, prime minister Tsipras will come face to face with EU leaders at a Latin American summit in Brussels today.

Patience is running thin on the EU-IMF side. On Saturday, the Greek leader appeared to lose the only political friend he had left in Europe when European Commission president Jean-Claude Juncker refused to take his call. Friends “have to respect some minimal rules”, Juncker told the G7.

Tsipras (40) has displayed strong political judgment since his election in January. He removed Yanis Varoufakis from the Brussels negotiating team when he realised the fiery finance minster was infuriating other member states. He has so far managed to keep the strong internal divisions within his own party at bay and the prospect of a general election that seemed likely last week has receded.

However the next few weeks are likely to be the defining moment for the young prime minister as he decides whether or not to lead Greece out of the euro.

Breathing space

Amid reports the official institutions may extend the current bailout, which expires on June 30th, to March 2016, Greece may be given extra breathing space to secure a deal. This though will still mean Greece agreeing to measures on pensions, VAT rates and privatisations opposed by Syriza.

Further, even if an extension of the bailout to March 2016 is agreed, this would constitute only the beginning, not the end, of the story. It is virtually certain that Greece will need some form of third bailout, which is likely to last some years.

However, after five years of aggressive cuts, it is not surprising the Greek electorate gambled on an alternative strategy. Despite persistent claims about Greece’s reluctance to implement much-needed changes, the Greek government and people adhered to most of the bailout terms – infinitely more punishing than those imposed on Ireland and Portugal – over five long years.

While there had been signs the economy was turning a corner, debt levels and unemployment are as high as ever. The economy has shrunk by a quarter.

The state of the Greek economy is a damning indictment of the euro zone’s response to the crisis and a misguided troika programme that focused too much on headline figures and targets instead of finding solutions to Greece’s underlying structural problems, such as its lack of exports and foreign direct investment.

Inherent flaws

The sorry story of Greece’s membership of the euro also exposes the flaws inherent in the single-currency project from the outset. The Greek economy undoubtedly needed reform, but the cuts implemented should have been imposed over a longer timeframe, not rushed through in five years at enormous social cost.

Nonetheless, the dictum “we are where we are” is depressingly relevant, as Greece and the euro zone remain tethered to the currency union they both entered knowingly. Whether Tsipras and the Greek people will choose to remain part of this unhappy union or take a jump into the unknown remains to be see