The current Greek crisis was caused by the failure of the outgoing government to get its nominee for president approved within the permitted three attempts. The impasse in December triggered elections in January which saw Syriza, a radical coalition of the left, become the largest bloc in parliament and gave them the right to form a government. They came to power on pledges to end and reverse austerity measures, restore Greek dignity and end the “humanitarian crisis”, end privatisations and see half of the nation’s debt written off (at the expense of other Eurozone citizens). These pledges were understandably popular in Greece and much less so in other Eurozone governments and with the IMF.
Since February, the Greek government has been trying to submit viable (in the eyes of her creditors) proposals that would permit Greece to honour its financial obligations without violating its popular mandate. The issues of “German war reparations” and debt forgiveness have essentially fallen by the wayside as Greece seeks to obtain the final tranche of IMF/EU bailout money which it must receive by Tuesday night (30/6/15) to avoid a sovereign default. Even if Greece was given this money, it is all but certain that a further loan would need to be granted to help Greece remain afloat whilst the confidence of money markets on the credit worthiness of the Syriza administration recovers.
The main sticking point at the moment seems to be that whilst the Greeks have given ground (somewhat) on VAT and are proposing that the rich pay more tax, the creditors want to see further public expenditure savings (they are only austerity measures if we call them that!). Given that Greece has a very poor reputation for effectively taxing the income of its people and that the rich are likely to be better able to shelter their wealth and exploit any legal means to avoid tax liability, it is unsurprising that the creditors are lukewarm on the idea. In this situation, sovereign default is becoming increasingly likely.
If Greece does default, we are in uncharted waters. It would almost certainly be forced to leave the Euro (unless a deal is brokered almost immediately and cannot be implemented in time which is increasingly likely even in the best of circumstances). That is problematic since the idea of joining the Euro was supposed to be a permanent thing and a “Grexit” might undermine confidence in the currency. I suspect that this won’t happen. The creditors have shown enormous restraint in dealing with Greece and it has been clear from the outset that they will do all they can to help Greece remain in the Euro. In essence, Greece will leave the Euro because it is not prepared to do what it must to remain in it – that is a different beast altogether. Currently, Greek GDP contributes one fiftieth of the value of the total Eurozone economy. Having weathered the storm of the Global Financial Crisis, the Eurozone will not founder if Greece leaves. The Greek people need the Euro far more than the Eurozone needs Greece. It is worth noting that even at the height of its popularity as Syriza came to power; its position (and that of the majority of Greek citizens) is that it wished the nation to remain in the Euro. The insistence that others should cover Greek sovereign debt is putting this at enormous risk.
