Possible Grexit Highlights Europe’s Real Deficit

Today, the possibility that Greece might leave the Eurozone – a monetary union of 19 states that share a common currency, the Euro – is as real as it has been at any point since the beginning of financial turmoil in 2008. The most immediate cause of commotion was the decision by the Greek Prime Minister Alexis Tsipras to call a snap referendum on the terms of a continued bailout that Greece needs in order to keep its banks and economy afloat. But the ultimate causes run much deeper.

The vote, which was held on Sunday and in which the Greek people resoundingly rejected the details of the proposal, was a political and democratic farce. Two things stand out. First, Greek citizens were asked to approve or disapprove of a particular version of a deal that was no longer on the table. It was, both in effect and intent, an exercise in the expression of dissatisfaction – undertaken under the belief that Greece’s creditors should care. They don’t.

(c) Aesthetics of Crisis via Flickr

Street art in Athens, Greece. 2013. (c) Aesthetics of Crisis via Flickr

Second, there was a sharp contrast between how the vote was understood inside and outside of Greece. Greeks believed that a “no” vote represented a rejection of the ‘austerity first’ approach that the country’s creditors have sought to impose. A “no” vote would be, first and foremost, a vote to seek agreement on different terms. This is how Prime Minister Tsipras explained what he wanted out of the referendum: a better bargaining position.

But the rest of the Eurozone has a considerably less sanguine understanding of events. By voting “no”, Greece has rebuffed continued Eurozone membership on the terms that the rest of the Eurozone proposed.

Five years ago, the thought of a Grexit sent shockwaves through financial markets, not because the Greek economy represents an important part of the Eurozone economy (it doesn’t), but because once the Rubicon of country exit has been crossed in the currency union, it becomes possible to imagine large and important, but imperiled economies like Spain, Portugal, or Ireland also leaving. No longer. The fear of ‘contagion’, as it is termed, has been largely vanquished – at least for now. Greece has convinced itself that it can play hardball during these negotiations because the rest of the Eurozone isn’t willing to let it go. It’s wrong.

At this point in the process, Europe’s creditor nations seem less concerned with the risk of contagion than they are with the risk of moral hazard: if Greece is allowed to unilaterally reject its obligations, then what disciplinary tools will the Eurozone be left with?

In Greece, and in parts of the American media, there has been celebration of the Greek rejection of the bailout. Much of it has come from the common tendency to focus on outcomes rather than process. Simply put, the austerity approach that the Eurozone has imposed on Greece has lots of detractors, and the Greeks, pushed to endure spending cuts and tax raises at the behest of foreign decision makers while their economy continues to sputter, make sympathetic figures.

Public voices like Paul Krugman and Joseph Stiglitz have decried austerity as precisely the wrong approach, and a long bevy of observers have been saying all along that Greece’s debt is simply too big to repay. At some point, Greece will have to either default or write down its debt – or restructure its repayments over such a long time horizon that it amounts to basically the same thing.

Substantively, all of those criticisms and observations are probably correct. Greece needs debt forgiveness and an influx of cash if its economy is going to grow, the kind of situation that a country would normally handle through printing money – precisely the option Greece gave up when it joined the Euro, and largely the reason that the Greeks are now looking to the Eurozone to do it instead.

(Greece also needs massive public spending and labor sector reform, a task that the country has shown itself stubbornly unwilling to take on.)

And here, finally, we get to the real problem. The Europeans have built a nexus of institutions – the European Union, the European Central Bank, the Eurozone, the European Court of Human Rights – well suited to making the obvious decisions that need to be made when things are going well, but poorly suited to making the difficult decisions that need to be made when things are going poorly. There has been much talk over the last few years of Europe’s budgetary deficits and of its democratic deficit, but Europe’s more troubling deficit might be its constitutional deficit. Simply put, Europeans are not clear among themselves on how difficult decisions are to be made, how the pain for such decisions is to be shared, and, more basically, the nature of their mutual obligations.

This is apparent in other areas as well, perhaps most dramatically in Europe’s pathetic response to the Mediterranean refugee crisis.

The Greek complaint over the last few years has been, in part, that Europe is not doing enough to help them, and that Europe not acting in the best interest of the Greek people. The criticism of Greek austerity presented by people like Krugman and Stiglitz assumes that the Eurozone’s relationship to Greece is analogous to the United States’ relationship with an American state. But that is far from clear. Is Europe a community of nations, or a multilateral treaty organization? We’re in the process of finding out.

The easiest question to ask about how we got here is, who’s to blame? People are quick to find heroes and villains in the drama. Alexis Tsipras is either valiantly standing up to the faceless bureaucrats of Europe, or naively leading his country off a cliff. Similarly, Angela Merkel might be the steady hand in Berlin, or something much more reminiscent of mid-twentieth century Germany. Then there’s the recently resigned finance minister for Greece, Yanis Varoufakis, who so aggravated his European counterparts over the last few years that it was made clear to him that they would prefer it if he didn’t attend meetings any more.

(He resigned on Monday, and followed up his resignation by mounting his impressive motorcycle and heading to the pub for a beer.)

The truth is that no one in Europe has covered themselves in glory, the entire episode with Greece being an object lesson in the abrogation of leadership. At every turn, Europe (including Greece) has preferred ambiguity to clarity – the European Union has pursued the goal of “ever closer union” at the expense of never quite explaining what that actually means. But when the chips are down, you learn who your friends are.

Greece might be learning the hard way.

Follow Pedro on Twitter @IamPedroA.

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