Grexit – A battle of principles

The clock is ticking down to yet another deadline in the eternal negotiations between Greece and its creditors on debt and bailouts. The deadline this time is the 30th of June, when the country owes 1.5 billion euros in debt repayments to the IMF. If they don’t pay, they will have defaulted on a loan, and that could start them on the path to economic collapse and an exit from the Euro and European Union. 

Source: Underclassrising

To avoid this scenario, the Greeks and the Troika (European Commission, European Central Bank and the IMF) are negotiating on the budget reforms Greece must carry out in order to receive 7.2 billion in bailout funds. Yes, Greece is having to pay back 1.5 billion in order to borrow 7.2 billion more.

The situation has become utterly absurd, and everyone knows it. The concrete changes the negotiations centre on are essentially meaningless, a drop in the bucket compared to Greece’s immense debt. If the leftist Syriza government agrees to makes further cuts and tax increases, the economy will most likely be pushed back into recession, making it even more impossible for them to pay back their debt. This is not a battle of specifics, but a battle of principles.

Greece wants to force EU leaders to accept that Greek debt is unsustainable, and needs to be restructured. That is a long term fix, as unfortunately for Greece the EU is unable to come to that sort of agreements without a whole lot of debate. In the short term (this week) this means less budget cuts, and the release of further funds. The principle here is that Greece shouldn’t be punished for its past sins in a never ending economic spiral.

For the EU though, the principle is that Greece cannot be let off the hook for those past sins. After billions upon billions pumped into the Greek economy, European politicians (and their voters) are fed up. This means that in the short term the Greek government must accept further cuts. The future is the future, and at some point the debt will be restructured and eventually forgiven. At the moment though, Greece must finally make real changes to its economy to ensure that the mistakes of the past can never be repeated.

Make no mistake, this is a gigantic game of chicken. In one car sits the Greek government, betting that the EU will do anything to avoid a Greek default. In the other sits the EU, counting on the fact that Syriza does not want to have to leave the EU. If neither swerve, a Greek default could lead to the government running out of money, a run on the banks, a halt on money leaving the country, and the Greeks eventually having to leave the Euro and with that the EU. This is all uncharted territory, but in the short to medium term it would wreck the economy, leaving Greece with massive inflation, economic crisis and political instability. The effect a default will have on the EU is less certain. Greece is counting on the fact that the impact will be huge, but that’s not necessarily true. EU leaders believe they are much better prepared, and they seem willing to go to the line on that belief.

Of course, there’s always the chance that a short term deal will be agree which kicks the can down the road for another few months. At some stage though, one of the two sides will have to give in on their principles. Either the EU accepts that Greece should be allowed to stop austerity, or Greece accepts that austerity is the only alternative to default. With funds already moving out of Greek banks, time for one side to back down is running short.

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3 thoughts on “Grexit – A battle of principles

  1. Ron Bolden

    Hi Andre,

    I’m glad my Greek coins are over two thousand years old!! Anyway, I don’t think they would solve the current problems.

    Regards,

    Ron

    Reply
  2. Pingback: What is happening to Greece? | Your World Explained

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