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Despite widespread acceptance of the "big man" theory of history, individuals rarely make a personal and decisive difference in politics. But Prime Minister Alexis Tsipras of Greece is on the threshold of doing just that. He will soon decide whether to return his country to economic normalcy or crash it out of the euro and into an uncertain and poorer future.
Last Sunday's referendum opened up a new and more dangerous chapter in the crisis for Greece. It took away the ultimate decision making power to leave the euro area from the Greek people and gave it to Tsipras. Whatever the Greek people thought they were voting on in the referendum, their vote has been interpreted by other euro area members as their wish to distance themselves from the euro area. Until now, euro area members have not wanted to push Greece out of the monetary union, despite the government's antics. But as a result of the referendum, they will have no qualms letting Greece go if the country's leaders now fail to do what is expected from them.
Tsipras has been told to agree by July 12 to a new fiscal and structural reform program in return for assistance or face the collapse of the Greek banking system and an end to financial and economic ties with EU and euro area institutions. Without a deal, euro area and EU leaders will be prepared to stop any economic and financial support to Greece.
What would it take to avoid disaster? Tsipras would have to repudiate his past positions in a manner reminiscent of the opportunism and cynicism of President Frank Underwood in the "House of Cards" television series. In such a scenario, he would accept a new multiyear program from the European Stability Mechanism (ESM), the permanent crisis assistance program established in 2012. The deal would make explicit commitments to additional restructuring of Greek debt in the future. The European Central Bank (ECB) would immediately lift its emergency lending limits to allow Greeks to withdraw money from their bank accounts, potentially in exchange for a euro area fiscal guarantee for the credit extended to Greek banks. And with all 28 EU members present at the summit on Sunday, political agreements would be possible to mobilize additional resources from the EU budget to spearhead new investments in Greece.
Since 2010, Greece has reduced its budget deficit by more than 10 percent of GDP and made progress in reforming its economy, pension systems, and labor and product markets. Tsipras's ruling Syriza coalition has vowed to roll back many of these reforms, however. Greece must now face the reality that an ESM program comes with full conditionality imposed by the ECB, the European Commission, and the International Monetary Fund, which is certain to include new fiscal targets, further labor market reforms, privatization requirements, deeper pension reforms, product market liberalizations, and other far reaching structural reforms. Such a program would be more rigorous and demanding for Greece than the proposals just rejected. To make these steps more palatable, discussions about debt restructuring should take place, expanding on previous restructurings in June 2011, March 2012, and November 20121. Tsipras is well positioned to pull off such a dramatic turnabout. Through his big referendum victory, he has destroyed his political rivals and emerged as the only credible leader of either the current or any new national unity government. He should be able to secure a cross-party mandate from the main opposition parties, clearing the way for parliamentary approval even if he were to lose large parts of his own party's MPs. He could also probably survive a no confidence vote because opposition parties would hesitate to provoke new elections. Tsipras could thus remain prime minister, even without many of his own party MPs supporting him.
Tsipras would then go to the Greek people and sell his concessions as the obvious price for staying inside the euro area, while taking political credit for restoring access to their bank accounts on Monday. He would also be able to avoid further defaults against the ECB and other creditors, repay the IMF its arrears in a relatively short time, and fully pay pensions and wages in Greece.
Refusal to strike a deal on Sunday would terminate the ECB's emergency lending to banks, sending them into insolvency and indefinite disclosure until Greece secures new funding from the euro area, forces bank depositors to forfeit their funds, or reintroduces a new currency and recapitalizes their banks in new drachma. Such a course would implode the Greek economy, preventing the government from paying pensions and public wages with euros. A cutoff from international payment systems and widespread shortages of vital products would quickly spread. Medicine and some food items would became unavailable. The rest of the European Union would express their regret at this outcome, while redirecting emergency humanitarian aid from elsewhere to Greece after losing trust in Tsipras.
Tsipras would be forced in these circumstances to make payments in the form of new IOUs or a new Greek currency—steps he has adamantly opposed until now. The domestic upheaval created by such a collapse would likely quickly cost Syriza its governing power, though perhaps Tsipras would retain his impeccable revolutionary leftwing radical credentials as an Aegean Che Guevara.
The choice is his, but judging from the recent request letter for a new 3-year ESM program, Tsipras may be ready for flexibility. In it his government referred to the previously nonnegotiable demand for debt restructuring as "part of broader discussions to be held" [emphasis added]. The letter also said that "Greece welcomes an opportunity to explore potential measures to be taken so that its official sector related debt becomes both sustainable and viable over the long term." All of which sounds a lot like the euro area's position to date.
Note
1. See details in ESM 2014 annual report , page 29.
