The whole world is mesmerised by the latest turn of events on the Greek crisis. Yesterday Greece applied for a third two year bailout of some €30b as the previous bailout extension was coming to an end at midnight. That was rejected while the proposed referendum was still scheduled to take place next Sunday, 5th July. Today Prime Minister Tsipras wrote a letter asking for a deal having abandoned most of his earlier red lines except for VAT concessions on small islands and a more gradual withdrawal of early pension support. It will be interesting to see how this is received and whether the creditors would trust this government with implementing the programme given its earlier intense opposition to it.
But it seems at least that the Syriza-led government in Greece has got increasingly worried. The situation on the ground is getting desperate. Greece missed out on a debt repayment to the IMF on 30th June, the first advanced country to have ever done so. The bailout period has come to an end and the money that may have been still available for Greece has now effectively disappeared. There are questions about whether the ECB will raise the level of Emergency Liquidity Assistance to the beleaguered Greek banking system to prevent banks in Greece becoming insolvent given the pressure they have been under after a run on the banks most of last week. There is always a chance of course that the ECB will now, following the non-payment of the €1.6bn debt to the IMF, feel obliged to completely withdraw its support to the troubled banking system rather than just keeping it frozen at last Friday's lever of just under €90bn.
It is finally becoming clear to the Greek people that the proposals made by the Greek government to the Europeans have as much austerity in them as the creditors' offer though there is a difference on how the pain is distributed. Life will be difficult anyway whatever happens—and the population is getting a feel of it right now with the week long closure of banks and the introduction of capital controls.
It is also clear that a No vote will be a vote to exit the euro even though Tsipras has tried to argue that instead it would give him a stronger negotiating mandate. It will herald a period of huge uncertainty and low growth. A return to the drachma which would immediately devalue would lead to higher prices for the population, maybe even hyper-inflation, reducing the value of earnings and in particular hitting pensioners. And the banking system will remain vulnerable and incapable of supporting the economy.
The truth is that Greece should probably never have joined the euro in the first place. And it should have reformed ages ago. But from where we stand the best that can be achieved now is to stay in and negotiate a deal that brings back some sense of normality, however tough in the short term, even at this 11th hour . But for the interests of Greece, and of Europe as a whole, it should be a deal that at the very least offers future growth prospects by addressing the size of the debt which everyone now accepts is unsustainable.
