14 April 2015

Greece: the IMF is running out of patience and Syriza is running out of time


Veterans of the latest Greek crisis may recall that when in February the Eurozone agreed to a four month extension of the Greek bailout programme, that depended upon the Greek government’s proposed replacement reforms being accepted by the “Institutions” (IMF, ECB and European Commission). These Institutions said the first draft of these replacement reforms was inadequate but could be developed further, with a final date for acceptance in April. Well it’s mid-April and we’re not obviously any nearer to an acceptable set of reforms. Quite the reverse. The IMF is now reported as saying that it cannot envisage a successful conclusion to the review.

Excitable Greek ministers threaten default or new elections or both. European officials opine that such elections would be a de facto referendum on Greek euro membership.

That may be right, but is premature. Before they try new elections there must be a chance that Syriza will first try to marshal the broadest anti-austerity coalition it can within Greece, and see whether some variant reform programme could be acceptable both internally and to Eurozone partners. By originally forming a coalition with ANEL, Syriza gave itself a little room to compromise visibly with its Eurozone partners – by ditching ANEL in favour of some other coalition partner, perhaps losing some leftist elements within Syriza at the same time. It could then perhaps have a coalition with the centrist but still anti-bailout To Potami, and perhaps even draw in some anti-bailout factions from New Democracy or Pasok at the same time.

I suspect that such a move would buy some more time before the Eurozone finally gave up all hope that the Greeks could be dealt with as reliable partners over the longer term. But it would not change the final result.

In the end all the current excitement is just the hors d’oeuvre. The main course for this crisis comes – tick, tick – in July and August when Greece has much larger repayments due and will need a €50 billion if it’s to make it to the longer term still inside the euro.

Can a new Greek governing coalition secure consent from and consensus among the Greek people for a new austerity and structural economic reform programme, that their Eurozone partners will believe they will stick to and be willing to provide €50 billion extra to fund? I doubt it.

On a final note, it is important but difficult for commentators on Greece and the Eurozone crisis to distinguish between what they think ought to happen and what they predict will happen. An ought is not enough for an is.

My own view is that Greece would lose out enormously over the longer term, in both economic and (more profoundly) politico-cultural terms if it left the euro, though it might gain economically in the short term. Indeed, those short term economic gains could be large – making departure increasingly tempting and the judgement call within the realms of reasonable political debate.

On the other side, I believe the Eurozone would make a clear gain by Greece leaving, since that would allow the rest of the Eurozone to move much more rapidly to the deeper political and fiscal integration that it requires.

But that’s just my view. As I see it, the Eurozone is less confident than I am that it would gain by Greek departure. It, rather, thinks the Greeks are now almost bound to go eventually so it might be best to get it over with. Conversely, the Greek government is much less sure than I am that it would lose out in the long term by leaving or gain in the short term. It fears short term losses might outweigh longer term gains.

Matters are thus very confused and outcomes hard to predict. On balance I still think they’ll somehow make it to June (30% for Grexit before then) but won’t get a third bailout and Greece will probably be out of the euro by the end of the year (70%).

More drama awaits.

Andrew Lilico is Chairman of Europe Economics.