There is a famous Greek myth about two sea monsters, Scylla and Charybdis. It is said that they lived on opposite ends of the Strait of Messina, in Italy, terrorising ships that attempted to pass the narrow strip of water. If any vessel somehow avoided one of the monsters, it was certain to be destroyed by the other. Today, that legend is encapsulated in the saying “between a rock and a hard place”.
In June 2015, I wrote that Greece found itself in a similar predicament. By the end of June that year, it had to repay the International Monetary Fund (IMF) US$1.7 billion in loans. Additionally, in July and August, the country was due to pay the European Central Bank (ECB) nearly €6.8 billion (HK$65 billion). It did not have the funds to honour those obligations. Crucially, the European Commission was refusing to release €7.2 billion in bailout funds unless the Greeks agreed to additional fiscal austerity measures. With Greece unable to repay its debts, it faced expulsion from the euro zone, a scenario then commonly referred to as “Grexit” – these were the pre-Brexit days!
This is where Greek Prime Minister Alexis Tsipras, and his Finance Minister Yanis Varoufakis, faced a real conundrum. Exasperated Greeks elected the left-wing Syriza party in January 2015 on a strong anti-austerity mandate. However, Greece’s European creditors were demanding tough concessions, which included cutting pensions and raising taxes. Tsipras had voiced strong displeasure at these proposals. For him to capitulate and agree to the loan conditions would be political suicide. Hardliners within Syriza would abandon the government, potentially forcing a fresh election to be called. What’s more, the spending cuts required by the agreement threatened to deepen the country’s economic woes. Austerity measures could reduce growth and were likely to extend Greece’s protracted recession, a proposition the Greeks could ill afford.
Unfortunately, the other option was hardly enticing. Should Athens reject their creditors’ proposals, the consequences could be calamitous. Depositors would flee Greek banks and emergency funds from the ECB would no longer be available, precipitating a liquidity crisis that could push financial institutions, and the government, into default. Capital controls would have to be implemented, and Greece would effectively be forced out of the euro zone. It was, and is, in Greece’s benefit to stick with the euro, and while few Greeks would support austerity measures, the majority do indeed wish to remain within the euro zone.
If Greece left the Eurozone, the country would have had to return to the drachma, its previous currency. This, coupled with an already crippled economy, would result in immediate devaluation of the drachma, leading to inflation and an extended economic crisis.
With neither side willing to compromise further, there seemed little hope that common ground would be found. Tsipras and Varoufakis had to choose their monster. But they did not do so. Instead they put the issue to a referendum, with the Greeks overwhelmingly voting not to adopt the austerity measures. Greek’s continued membership in the EU was thrown in more doubt than ever.
But the Greek government had slightly more leverage in the financial negotiations than was apparent. European politicians frequently claimed that a “Grexit” would be economically manageable. That was never a particularly convincing assertion. Had Greece left the euro, the ECB would have faced huge losses on its loans to the country. Also, there was a serious possibility of spooked investors pulling out of the European Union (EU). Regional growth could have stalled. It was, and is, in everyone’s interests to see Greece pay off its debts.
Above all, it was crucial for the European Commission to recognise the systemic nature of Greece’s economic problems. The process of hammering out an agreement to resolve short-term debt obligations must not mask the need to remedy Greece’s economic malaise. Athens’ debt obligations totalled €320 billion, a colossal 175 per cent of the national output. Greece’s creditors were at the time demanding that the country maintain a primary surplus of 3.5 per cent of the gross domestic product, an entirely unrealistic number. Maintaining such a budget surplus would require strict belt-tightening measures, which, by nature, crimp growth. Of course, it was undeniable that Greece needed economic reforms, and that the Greek government had to find a way to rein in wasteful spending and implement changes in the pension system and labour market.
Later that year, the European Commission drew up a new bailout proposal worth €86 billion. Unfortunately, but not unexpectedly, strict austerity measures were still attached. This time, there was no referendum. Tsipras, the anti-austerity crusader, did the only thing he could do: he capitulated, accepting the terms. It was the third bailout of Greece; another was to follow in the summer of 2016. There was an outcry in Greece, and many members of parliament from Syriza quit the party. A weakened Tsipras clung on to power. The economy stumbled along – catastrophe averted, but celebrations still far away.
Two and a half years ago, I wrote that sensible concessions and reforms could see Greece avoid the least palatable outcomes. I also noted that it would be desperately optimistic to expect the Greeks to escape economic hardship in the near future. But who could have predicted that unemployment would remain at 20 per cent today, and that the economy would barely avoid contraction.
While the Eurozone continues to recover and grow, albeit slowly, Greece languishes. But the new year may bring new hope. Economists are predicting growth of two per cent or more, and optimism abounds within the European Commission and the Greek government. Tsipras has all but forsaken his populist roots, spearheading pragmatic – and unpopular – reforms in the Greek bureaucracy. His fellow EU leaders love him for it. Many hope this is the year it all changes – with nearly half of Greece’s youth unemployed, it better be.