20 February 2015

The Eurozone meets to debate Greece’s fate… again


This afternoon it’s the supposedly critical Eurogroup finance ministers meeting at which the Eurozone will decide whether it accepts Greece’s application for a six month extension to its “programme” (the term given to the combination of loans, loan repayments, fiscal targets and economic reforms Greece and the others have agreed to).

As the meeting begins the situation is as follows. Greece’s current programme expires on February 28th — i.e. next week. The new Greek government led by the hard left Syriza coalition has said that the current programme is totally unacceptable — the finance minister described it as “fiscal waterboarding” — and there was no possibility of its being extended or repeated. Despite this, on Thursday it applied formally for a six month extension.

That may sound like total surrender. And politically it was. But then there’s the small matter of the details. When it came to the details it turned out that in fact Greece was applying for a loan extension with full freedom to reverse the previously agreed economic reforms that might allow it to repay its debts and to repay what it felt like this year.

Germany said no. Belgium said no. Slovenia said no. Finland said no. But then… France said maybe and the European Commission essentially said yes.

That may seem like it means there will be a serious split at today’s Eurogroup. There very probably won’t be an agreed deal. Most of the leaks comments from officials suggest that if there is any agreement at all, it will be next week now — perhaps on Monday at an heads of government summit (rather than, as today, just the finance ministers). Today is more about rebuilding working relationships after three disastrous Greece vs. the rest engagements over the past week. The mood music on that scope is more amicable than it was — but given that ‘where it was’ involved the Syriza-supporting papers in Greece saying the German finance minister wanted to melt the Greek people so as to turn their fat into soap, whilst the Germans said the Greeks had pretended to surrender whilst leaving behind a Trojan Horse, “more amicable” was not a high hurdle to cross.

One should not overstate the splits within the Eurogroup, either. The French and Italians, currently being investigated by the European Union for supposed breaches of the fiscal rules they themselves have signed up to, have unsurprisingly been saying that it is important that such are applied flexibly. That’s not mainly about Greece. That’s mainly a coded reference to their own cases. In practice, they are just as likely as the rest of the Eurozone to insist that if Greece wants to be treated flexibly, it has to sign up to and stick to the rules.  There’s a pretty good chance that, if push comes to shove and the Greeks stick to their insistence of a no-strings loan extension or a broader acceptance across the Eurozone that “austerity has failed”, it’ll be 18 vs 1.

As for the European Commission suddenly being Greece’s closest allies, I offer you the following new definition. Irony, n.: Syriza, starting by insisting discussions with troika technocrats be replaced by direct engagement with elected politicians, now trying to use European Commission technocrats to overrule Eurogroup heads. Irony aside, the European Commission has neither votes nor money to give to Greece and is unlikely to shift Eurogroup finance ministers much. Its role here is to act as a facilitator, so its unsurprising that it’s trying to appear conciliatory to the isolated side. The Greeks should not make the mistake of over-interpreting that. Many things those on the European Commission may be, but they are by no means fools, and they will have no appetite whatever for trying to run against a clear consensus amongst Eurozone members.

With no deal likely today, unless there is a clear outline for a deal to be agreed on Monday, the position of the Greek banks and of Greece’s euro membership more generally will hang by a thread. The European Central Bank’s Emergency Liquidity Assistance for Greece’s banking sector is all but exhausted.  It’s a bank holiday on Monday but if there’s no deal then then the Greek banks may run out of cash as soon as Tuesday.

Unless there is a deal on Monday – or indeed as soon as this weekend if this afternoon’s negotiations break up as acrimoniously as those of the past week have — I’d expect Syriza MPs to start floating the idea of Greece holding a referendum. Remember that in 2011 the Greek Prime Minister George Papandreou announced there would be a referendum on conditions the Eurozone were requiring of Greece for its second bail-out.  The 2015 version might contain three options — A) Leave the euro; B) Accept the Eurozone’s terms; C) Hold fast to Syriza’s current demands. Is it possible to get as far as a referendum, under these conditions, where one of the options is leaving the euro, without triggering mass bank runs and a financial panic? Without a deal on Monday, we may soon find out.

Andrew Lilico is Chairman of Europe Economics.