PS21 Insight: With Greek vote, euro reaches crunch point


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  • First question is whether ECB will continue to support Greek banks
  • Greek Eurozone exit would completely undermine concept of the single currency
  • All sides need solution — but ideological gap between Greece and creditor nations now deeply entrenched.
  • Huge gulf between democratic will of the people and those in central Eurozone creditor states like Germany
  • Contagion could spread to other troubled Eurozone economies causing new bank runs and spiking borrowing costs
  • “Fundamental deficiencies” all Eurozone project now exposed, must either be rectified or project may unravel

On Sunday, July 5, Greece rejected Eurozone bailout conditions in a referendum. Below are a selection of comments from the Project for Study of the 21st Century (PS21).

Sir Michael Leigh is senior adviser to the German Marshall Fund of the United States. He was Director General for Enlargement for the European commission from 2006-2011. From 2003-2006 he was Deputy Director General for EC External Relations. He is a member of the PS21 International Advisory Group.

Giuila Pastorella is a Ph.D. candidate at the London School of Economics.

David Lea is western Europe analyst at London-based consultancy Control Risks.

Peter Apps is executive director of the Project for Study of the 21st Century. He is currently on sabbatical from Reuters where he was global defence correspondent after previous assignments covering political risk as well as emerging markets.

Please credit PS21 if you wish to use any of the material below. If you wish to contact us to speak to any of our advisors or Global Fellows, please e-mail

Firstly, the core Eurozone countries and the European Central Bank in particular must decide if they will continue forcing the Greek banking system. 

Leigh: The first priority is for the European Central Bank to decide quickly on maintaining Emergency Liquidity Assistance (ELA) to the Greek Central Bank. This may mean raising the ceiling on such assistance. ELA will keep the Greek banking system afloat while negotiations are held on a new bail-out package.

Provided these negotiations succeed quickly and there is a new agreement in place involving serious reform commitments by Greece and acceptance of further debt reduction by the creditors then there is no reason for the Greek banking system to collapse or for Greece to leave the euro. This would occur only if the ECB pulled the plug on ELA or if rigidity on either side prevented a new agreement from being concluded.

All sides need a deal — but it will be difficult.

Pastorella: The paradox is that, despite opposing views, and despite the outcome of the referendum which creates more problem than it solves, both debtors and creditors realise that a solution needs to be found. That is, independently of who is right – morally or financially. The first statements of the Greek Prime Minister Tsipras after the vote and those of other European leaders show this clearly. While this might be good for the future of the European project, such moral feeling of unjustness and impunity will persist in both debtors and creditors, whatever the solution. And these kinds of deep-running moral ‘memories’ leave scars that not even full financial recovery for Greece, admitting it will ever happen, will be able to erase.

Apps: While the Greeks have made a decision, it is not entirely clear what that decision means. There’s no doubt that it is not in itself a vote to leave the eurozone. But they can’t carry on without external support — the banking system will collapse, everyone will lose their savings and they wind up crashing out of the currency.

Essentially, Greece has torn up the bailout conditions and wants a better deal. The rest of the Eurozone now has to decide whether to meet them — and what they will do in the meantime while Europe’s leaders make up their minds. 

Lea: The ECB said just last week that it couldn’t extend the ELA if Greece wasn’t in a bailout programme – can it about turn on that so soon? Perhaps more than that, can it be seen to about turn? Probably not immediately – and Greece probably needs more ELA immediately.

Meanwhile, many of the EU leaders have felt throughout the last few months that SYRIZA have been more about the drama than about the crisis, and won’t want to change course in response to a referendum that they thought was a coup de théâtre.

Varoufakis said he was sure there would be a new, better deal done within 48 hours of a No, but it’s difficult to see where he gets that confidence from.

If Greece’s banks are not supported and no further bailouts negotiated, Greece will be unable to pay public sector wages later this month without issuing some kind of IOU or new currency. This might, as some have long feared, spell the beginning of the end for the euro.

Leigh: If Greece were forced out of the euro this would call into question the irreversibility of the currency union. It would then appear to be no more than a system of fixed exchange rates that can be altered whenever a country faces a severe liquidity crisis. The next time a Eurozone country faces such a crisis this would spark fears that it too might be forced out of the euro. At a time when Europe is facing so many challenges, the creditors, led by Germany, are likely to go to considerable lengths to prevent this from happening.

Apps: The Greek crisis has never been just about Greece. It’s always been about giving Greece a tough deal to make sure the other larger fringe Eurozone economies go through with their reforms. And also about maintaining enough confidence that the Italian, Spanish and Portuguese banking sectors don’t unravel as well.

If the wheels come off in Greece, the real question is whether it looks so grim that people start withdrawing their savings from banks in other countries that you could also imagine leaving the euro on a bad day. That could become a self-fulfilling prophecy very quickly.

It’s also worth watching the borrowing costs of banks in those countries. They will probably need additional support from the ECB.

Lea: Nowhere else is in as parlous a fiscal position as Greece – and the gap now is wider than it was. But it’s about confidence – Portugal’s just ridden out a different kind of banking crisis, Spain too, another still in Italy, and there is a question over whether the confidence in those countries’ banks can be maintained.

And what will the bond market think? And if Greece is no longer dragging on the euro, how high does its value go? And what do the export-led economies think of that?

The political gulf between Germany and Greece in particular has never been larger. That makes a political deal harder to reach than ever.

Pastorella: ‘Before there were tanks, now there are banks’. This is how one of the young Greeks interviewed by BBC Today Programme this morning summarised the feelings of the new generations in the Hellenic democracy. The moral certainty with which this supporter of the Oxi (no) vote compares the uprising against the dictatorship of the Colonels in the 1970s with the No-vote in the referendum is indicative of the main problem of the ongoing negotiations between Greece and its European partners.

Greek debtors think they are right and the creditors are wrong, and creditors think they are right. This black and white view of the world translates in, for instance, both parties using similar metaphors. The German officials talk of ‘the terrorist-like’ negotiating techniques of the outgoing Greek Finance Minister Yannis Varoufakis, and dissatisfied Greeks declare themselves fed up with the terrorism of international financial institutions.

The euro has reached crunch point. This in itself may provide new energy towards a deal despite the political differences.

Leigh: If the ECB continues to provide liquidity to the Greek Central Bank and if a new bail-out agreement is reached, the edifice will not crumble over the summer. However, there are fundamental deficiencies in the governance of the euro which threaten its sustainability, in the medium term. Without fiscal transfers–that is, genuine solidarity among Eurozone members–the euro will not last. However, Germany and other creditor countries are not ready for this. Perhaps the Greek crisis will finally start to make them face up to realities instead of continuing to extend and pretend.

Apps: If Greece leaves the single currency, it will be a colossal deal for Greece. If the entire single currency unravels, it might be the most significant event in European history since World War II, perhaps even more significant than the fall of the Berlin Wall and collapse of the Soviet Union.

In holding a referendum, the Greeks have indeed injected a measure of democracy into what had been a very very bureaucratic and elite-led process. And they’ve made it clear just what they think of that.

The other side of that, though, is that the German electorate in particular is also fed up. It’s not clear that that can be squared. And if it can’t be, we’re in for a very interesting summer indeed.

Lea: While I’m not as pessimistic as some on the euro’s future, there are few good ways forward from here. Always remember, though, that Mario Draghi’s ‘whatever it takes’ speech was about preserving the euro per se, not its exact membership. I do think, that a mix of a better appreciation of just how different Greece is and better governance procedures now in place will go a lot of the way to ensuring the eurozone stays at 18 if it drops to 18.

Tsipras has been big on references to the noble democracy of referendums. I wouldn’t rule out one of the more hawkish countries asking its people some kind of question too – after all, the will of the Greek people is sovereign, but only in Greece. Others have democracy too – and you might find they think rather differently.

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