Greece, Act II—More Kabuki than Tragedy
In the nearly three weeks since European Union leaders called on the Greek government to produce a credible fiscal austerity plan and broader economic reform package, an increasingly strange, but predictable and scripted political theater has unfolded among the key actors. All are trying to pass the cost of restoring Greece to a long-term sustainable path on to someone else.
On February 11, the European Union urged Greece to produce its plan by March 16, while holding out the promise that "Euro area Member states will take determined and coordinated action, if needed, to safeguard financial stability in the euro area as a whole."
The Greek government has called for "more details" from its EU partners about the scope and shape of any future financial assistance. While promising to do "whatever it takes" to restore the country’s fiscal balance, the government initially offered an evidently inadequate austerity program to the European Union and the financial markets.
Obviously the Greek government would like to know just how much economic support it can expect to receive. It knows, for example, that any hard public commitment of billions of euros by its eurozone partners will immediately reduce interest spreads on its bonds. Similarly, the Greek government would like to limit the share of the costs of its economic crisis borne by its own citizens. It therefore initially low-balled its austerity program, hoping that the program will nonetheless be sufficient to secure international financial support.
Greece’s would-be rescuers in the eurozone, on their side, would obviously prefer not to have to pay a cent to Greece. They would like to rely solely on the Greek government getting the necessary political support among Greek citizens to sort its finances out, without feeling it was responding to outside pressure. In other words, the eurozone is trying to get Greece to "bail itself out" by defaulting not on its bonds and international commitments, but by reneging on promises by Greek governments to its own citizens over the years. Greece should decide on its own, according to this view, that its citizens will have to retire at 67 instead of 55 years of age, or earn 15 to 20 percent less in less secure public sector jobs. According to data from the Bank for International Settlements (BIS table 9), French and German banks hold the majority of foreign exposure to Greek debt. Thus the French and German governments, who in the event of a Greek default would likely have to once again rescue their domestic banks, feel the need for Greek action most acutely. Both have a very direct interest in demanding maximum austerity from the Greek government rather than foreign bond holders.
The same logic was evident when Chancellor Angela Merkel stated in a recent German TV interview that "Greece must do its homework," while asserting that no decision had yet been taken to provide financial assistance. The political conditionality and timing for any eurozone assistance to Greece is clear. Before any assistance can be agreed, Greece must first implement credible, indeed drastic austerity measures, especially in light of the recent EU precedent of Latvia and Ireland accepting double-digit cuts in public wages. Functionally, such conditionality is equivalent to a standard IMF program, where each tranche of loans requires the recipient government to implement austerity measures designed by the IMF. Indeed, it looks like the eurozone "political conditionality" might be as tough or tougher than the usual "bureaucratic conditionality" meted out to countries by the IMF. Politics simply demand strict conditionality and, as this crisis has clearly shown, any invocation of "European solidarity" with Greece will not soften the blow.
For their part, eurozone governments and EU representatives have been utterly unwilling to offer concrete details about their promised "determined and coordinated actions." Nor have there been any hard euro numbers. Some commentators (usually of a euro-federalist persuasion) see this coyness as proof of the usual lack of European ability to act decisively in a crisis in the absence of a European economic government.
All eurozone governments, especially Germany (which may also have constitutionality concerns), face increasingly hostile public opinion toward any financial assistance to Greece. Publicly stipulating any single figure of, say, €20 billion in assistance to Greece will provoke an outcry—despite the likelihood of Greece repaying the assistance without adding to other countries’ government debts (since the debt can be incurred through state-owned banks). The reaction is sure to be along the lines of complaints focusing on estimates of how much the loan cost each German taxpayer, undermining public acceptance of the financial assistance the moment it is announced. Politically for both Greece and eurozone governments, the logical stance for the time being is one of "constructive ambiguity." It’s not yet clear just where the "Greek buck will stop" in the European Union. But the political theater surrounding the process is intended to obscure the outcome for as long a possible.