Greek crisis: Grexit is still a possibility

Last night, the Greek Parliament voted to approve a second emergency bill, paving the way for discussions about the country’s third bailout of up to €86bn to proceed. Like the first bill, which provided for austerity measures worth about 2.5 per cent of GDP, approval yesterday depended on the support of opposition members of parliament. The number of Syriza’s 149 lawmakers voting against the government, or abstaining, dropped slightly from 39 to 36, still leaving Alexis Tsipras’ political position in the balance.

So what happens next? According to Pierre Moscovici, the European Commissioner for Economic and Monetary Affairs, bailout talks could be completed by the second half of August. Another ECB loan falls due for repayment on 20th August, but if talks have not been completed then, a new bridging loan will probably be forthcoming. In view of the depletion of the government’s majority in the Hellenic Parliament, and the split inside Syriza, Alexis Tsipras has indicated that there could be new elections on the 13th or 20th September, once the talks are completed. Events are now unfolding in three spheres: the technicalities of the bailout agreement, Greek politics, and the eurozone itself.

Slowly, Greece is backing away from a state of emergency. The banks re-opened last Monday after a three-week shutdown, offering limited services. Capital controls remain in force, and are unlikely to be diluted until the banks are recapitalised. This is expected to happen as a part of the bailout, once the banks have been subjected to an asset quality review and stress test. The process will have been facilitated by approval last night of the Bank Recovery and Resolution Directive. New civil code reforms, designed to improve the efficiency of the justice system, were also approved. With bridging finance extended by Greece’s eurozone partners, IMF loan arrears have been paid off, as has an important €4.2bn principal and interest bill to the ECB, which in turn, raised liquidity assistance by about €900m to Greek banks (Emergency Liquidity Assistance) for the second consecutive week.

These processes may seem both esoteric and rather peripheral but the Greek economy can’t stabilise without them, and it is important for Greece’s creditors— and to their willingness to grant Greece debt relief at some point—to see Greece make progress in matters of implementation and governance. They may also be a weathervane, hopefully, for more substantial reforms to Greece’s tax system, vested interests in the professions and unions, and education and legal systems designed to make the country less sclerotic and more responsive, and ultimately attract private capital again.

Inside Greece, Alexis Tsipras is treading a thin line. He has to be careful not to be outflanked by supporters who now question his authority and competence on the one side, and by the more radical left part of Syriza—including prominent members such as Yanis Varoufakis and House Speaker Zoe Konstantopoulou—on the other. In considering new elections in September, he may want to “cash in” on Syriza’s continuing, if sliding, popularity. The latest opinion polls give Syriza 42.5 per cent, against 21.5 per cent for the centre-right New Democracy party. But to capitalise on this, he is most likely going to have to swallow hard, move the bulk of Syriza towards engagement with a new left-of-centre coalition, and risk a split with the party’s hard line Left Platform rump who have criticised the terms of this week’s bill. Failure to offer strong leadership and lessen festering political tensions would make it harder to successfully implement the latest agreement.

A rising tide of anti-German opinion outside the eurozone, and the joining of France and Italy in opposition to Germany’s Grexit “plan” are conveying an impression that the balance of power in Europe is shifting back to France. Nothing could be further from the truth. Angela Merkel’s decision to back her hawkish Finance Minister, Wolfgang Schäuble, in the negotiations with Greece reflects a self-confidence that was not there before, and especially not at the end of 2011, when she and then President Sarkozy had broached the issue of Grexit at the Cannes Summit, and then promptly rejected it.

Now, Germany also has a support network in the eurozone that stretches north-south from Finland down through the Baltics to Poland and the rest of Eastern Europe. The dynamic of the Germany-France relationship is not clear any more. Even though Merkel conceded on Grexit to France a few weeks ago, she may not do so again if this bailout programme breaks down for lack of compliance, or because a future Greek government rejects it outright. The change in Germany’s relative position in the eurozone is significant for the future of the Greece and the eurozone, itself.

Many people, certainly in the UK and the US, still see Grexit as the most likely outcome sooner or later. But it’s not an option we should wish upon the Greeks. Nor should we delude ourselves that Syriza’s economic and political agenda, until now at least, was ever compatible with lasting membership. But if Alexis Tsipras really does take ownership of the most important parts of the bailout programme and tacks away from the Left Platform in his own party, aided and abetted by steady, if slow, economic growth in Europe—including in Greece from next year—the outcome of this crisis could be far less apocalyptic than many assume.