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The Real Meaning of Greece’s No

The Greeks have voted No. What is the road ahead for Greece and Europe?

Credit: Blömke/Kosinsky/Tschöpe - Wikimedia Commons

Takeaways


  • With a vote in one Eurozone country, the taxpayers of other countries can’t be told to send more money.
  • New financing could end up being a way to smoothen a Greek default and euro exit.
  • Europe will not push Greece out of the euro. But that doesn’t mean Greece won’t have to leave.
  • The institution facing the toughest choices after the Greek “no” is the European Central Bank.
  • The ECB would contain the damage by frontloading purchases of Italian, Spanish and Portuguese bonds.

Alexis Tsipras has won his referendum clearly. But this victory at home will not help him in Europe. (See TG’s recent coverage of Greece here).

Simply put, with a vote in one Eurozone country, you cannot order the taxpayers of the other 18 countries to send more money.

Still, the clear margin of victory may embolden Tsipras to take Greece out of the euro if he fails to strike a deal with Europe. He would then be likely to claim that it is Europe’s fault if Europe does not fulfill the impossible promises he has made to his Greek voters.

Count on Tsipras to ask for new negotiations on a softer bailout deal immediately, and perhaps offer a little cosmetic concession. He may even offer to sign de facto the deal he just rejected with minor changes – provided he were to get some extra debt relief on top of it.

However, the formal basis for that deal no longer exists after the expiry of the old bailout agreement. More important, the hole in Greece’s public finances keeps rising.

As a result, striking a bailout deal that could be ratified by Greece, the IMF and the Eurozone is getting ever more difficult. Any package would require both — more budgetary austerity and more money from abroad — to plug the widening hole.

What will the EU decide?

German vice chancellor Gabriel, head of the center-left SPD, was unequivocal in his post-referendum assessment. He warned that Tsipras “has torn down the last bridges” over which Europe and Greece could have moved towards a compromise.

The referendum result certainly makes it much more difficult to keep Greece in the euro.

While there will be some lively political discussions within the Eurozone about how to deal with Greece, the Tsipras/Varoufakis government has annoyed its European (and IMF) counterparts (and creditors) too much.

Their constant topsying and turvying will help find the Eurozone a common approach. Monday’s meeting between Merkel and Hollande in Paris is bound to be crucial.

According to some media reports, the EU may convene a special summit shortly, probably on Tuesday. However, Greece’s high hopes are likely to be dashed. Instead of a bailout deal with ESM money, Europe may possibly offer assistance from other EU funds.

The purpose of this new financing would be to contain the economic, financial and possibly humanitarian crisis that Greece may soon be facing.

But such assistance falls very much short of the Greek government’s much loftier designs. It could also very well end up being a way to smoothen a Greek default and euro exit — rather than to keep Greece in the euro.

It is important to note that Europe will not push Greece out of the euro. Nobody can. But that doesn’t mean Greece won’t have to leave. That is a straightforward function of the country’s financing needs.

Greece needs a lot more euros, which Europe may simply not send — unless Greece were to change its policies dramatically. Absent that, Greece would very soon need to issue its own currency, with a tumultuous interlude of IOUs first.

Grexit could become inevitable as Greece finds itself out of options – other than to issue a new currency for lack of euros.

What Varoufakis and Company completely underestimated is that their actions are bound to have a positive result – in that – we will likely see a significant political effort for closer cooperation between the other 18 Eurozone members.

The purpose of those steps is to strengthen the cohesion of the club, possibly including some additional infrastructure spending initiatives.

A difficult task ahead for the ECB

Meanwhile, the institution facing the toughest choices after the Greek “no” is the European Central Bank. Without a clear prospect of an immediate bailout deal, it would be very hard for the ECB to authorize continuing emergency support for Greek banks, let alone to allow an increase in such support.

Count on the ECB to tread very cautiously. Perhaps it would even see to it that small amounts of euro cash could still be withdrawn from Greek cash machines for a while until the political outlook becomes clearer, possibly after an emergency EU summit.

However, whatever Messrs. Tsipras and Varoufakis may believe, an increase in liquidity support for Greek banks to allow them to open again for serious business in euros, looks quite unlikely.

The ECB is likely to contain the damage from the Greek troubles, possibly by frontloading purchases of Italian, Spanish and Portuguese bonds. It would take those steps if spreads widen too far too fast (which is a judgment call for the ECB and not tied to any specific levels).

Finally, what about debt relief for Greece? Despite the occasional claims by Greece and some academics from afar, the real Greek problem is not a need for “debt relief.”

Europe has long ago offered to make sure that Greece’s public debt service remains bearable — if Greece pursues adequate economic policies.

Unfortunately, that is not the case under the current government.

The current policies in Greece are the problem. With the referendum, chances that the current government will change its self-destructive policies have clearly not risen, to put it mildly.

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About Holger Schmieding

Holger Schmieding is chief economist at Berenberg Bank in London. [United Kingdom] Follow him @Berenberg_Econ

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