WASHINGTON (MarketWatch) — Greece must now plan on a way to exit the euro EURUSD, -1.70% if it is to have any chance of staying.
This is not a conundrum; it is the way negotiation works.
The new government of Prime Minister Alexis Tsipras was forced to backtrack last month on its election pledges to get its foreign debt reduced and reverse austerity because it had no plausible alternative to European Union intransigence on extending the bailout.
“The strategy of hoping to achieve radical change within the institutional framework of the common currency has come to an end.” Costas Lapavitsas
The only viable alternative would be to exit the euro, default on the debt and suffer the consequences, and Athens was not ready to do that.
This “Plan B” cannot be a bluff and at this point it is better than even odds it will be the plan Greece will have to follow.
Tsipras and his finance minister, Yannis Varoufakis, have so far argued in their “Plan A” that Greece can stay in the euro, but pinned that belief on Germany and other EU members being reasonable.
Germany — as well as the European Commission, the European Central Bank, and the International Monetary Fund — made it amply clear in the initial round of negotiations that they have no intention of being reasonable in the way Tsipras and Varoufakis believe they should.
It was always a fairly delusional assumption that German leaders would suddenly see the light and embrace an enlightened Keynesian solution to the economic and social crisis in Greece. Berlin and Brussels remain pitiless and more convinced than ever of the rightness of their destructive neoliberal policies.
The only way Greece can regain its sovereignty — which is essentially what Tsipras’s Syriza party pledged to voters in its rise to power — is to reclaim its sovereign rights, and especially control of its currency and banking system.
The consequences of defaulting on the country’s debt would be dramatic, but relatively short-lived compared to the guaranteed long-term misery of the EU austerity program.
This is why Desmond Lachman, a former IMF official who is now a resident fellow at the American Enterprise Institute, prefers to use the word “Grexodus” to describe Greece leaving the euro, rather than “Grexit.”
Not only is “exodus” a word derived from Greek — unlike the Latin origin of “exit” — but Grexodus, Lachman argues, has the positive connotation from the Bible of a people “being delivered from a house of bondage and regaining their freedom from slavery.”
Lachman, in fact, has long been convinced that Greece will ultimately have to leave the euro in order to restore economic growth. In a comment last week, he urged Greece to bite the bullet, citing with sympathetic irony the German expression “that an end with horror is preferable to a horror without end.”
Tsipras faces considerable pressure from his own party to follow through on the election pledge to roll back austerity, even if it means abandoning his commitment to stay in the euro.
A Syriza member of Parliament argued this week that the only way Greece can beat austerity is to break free from the euro and urged his party to face up to this reality.
“The most vital step is to realize that the strategy of hoping to achieve radical change within the institutional framework of the common currency has come to an end,” Costas Lapavitsas, a professor of economics and longtime proponent of leaving the euro, wrote in an op-ed in the Guardian.
“The strategy has given us electoral success by promising to release the Greek people from austerity without having to endure a major falling-out with the eurozone,” Lapavitsas wrote. “Unfortunately, events have shown beyond doubt that this is impossible, and it is time that we acknowledged reality.”
German Finance Minister Wolfgang Schäuble observed caustically after Tsipras reluctantly consented to an extension of the bailout program that the Greek leaders would have “a difficult time explaining the deal to their voters.”
It would be difficult to overestimate the level of personal animosity that has been injected into this contest of wills between Germany and Greece.
Varoufakis for his part bragged about the “creative ambiguity” in the new accord, implying that it gives the Greek government wriggle room to proceed to a genuine renegotiation of the bailout terms.
Fat chance. Without a genuine plan to leave the euro and the will to execute it, the Greek government will have no more leverage in the next round of negotiations than it did in the first.
Not that even this threat would budge the Germans. German leaders might then fret and delay further, but they are more likely to just show the Greeks the door.
It’s anyone’s guess what the consequences of a Greek exit would be for the markets or what kind of political backlash there would be in other eurozone members. Opinions range across the spectrum from indifference to turmoil in markets, and from chastened obedience to outright rebellion in other peripheral countries.
But a Greek departure from the euro would create a precedent that could lead to considerable political pressure in Spain or Italy. Perhaps that prospect would prod the Germans into some moderation of austerity policies.
But none of this will happen unless Greece is actually ready to leave the euro. Germany is leaving Tsipras and company virtually no choice on that score.