Widening gap

Though Greece is a minor economy, if Athens does default, it could exit euro-zone, with repercussions for the rest of Europe.

The Greek government, after protracted negotiations with the European Union and internal deliberations, has decided that the only way forward to resolve the dilemma facing Athens is to hold referendum on the controversial bailout deal with foreign creditors. Greek Prime Minister Alexis Tsipras faces a very difficult decision and has decided to go to the people for an answer.

This decision on referendum came after Greece rejected an offer from its creditors to extend the country’s bailout deal as too little and likely to cause recession. The country’s international creditors made the new proposal so that it could avoid defaulting on its debt – provided it agreed to reforms. Though the deadline is June 30, Greece and its creditors have been deadlocked for repayment of an IMF loan.

The proposal of global creditors would have released around €15.5bn of funding, €1.8bn of which would have been available now. But the Greek government rejected it forthrightly saying that it “cannot be accepted.” “The creditors’ proposal to the Greek government would require introducing deeply recessionary reforms as a condition for the funding, which is totally inadequate, over the five months period,” said the statement from Athens.

The relationship between the Greek government and the European Union has been deteriorating for the last few months with the war of words now reaching an unprecedented level. The Greek prime minister has accused the lenders of blackmail, saying: “Europe’s principles are not based on blackmail and ultimatums.” “In these crucial hours, nobody has the right to put these principles at risk.”

German Chancellor Angela Merkel, however, has been urging Athens to accept what she has called an “extraordinarily generous” offer. President of the European Commission Jean-Claude Juncker, said he was “optimistic, but not over-optimistic” about the chances of a deal. Rejecting the charges from the Greek government, Juncker maintains that the deal “is about the Greek people, not the government” and that “there was no ultimatum. We are not running business by announcing ultimatum.”

The leftist government of Tsipras was elected on the promises of no more austerity measures. And so, it is finding it difficult to get a right balance between managing a deeply flawed economy and promises to its voters. The ordinary Greeks are tired of the austerity measures imposed on them over the last five years.

The critics point out that the European Union is finding it difficult to believe in the commitments of the Greek government because it has wasted five years of the bailout without making serious attempts to fix the structural problems that beset the economy – and in many cases, it is actually going backwards. Other European countries like Ireland and Spain which were facing similar problems are now on the road to recovery because they have managed to reform their economies over the last five years. But five years into its austerity regime, the Greek government has once again had to go cap in hand to its creditors and ask for more money.

International creditors
The differences between Greece and its international creditors remain as stark as ever. Greece has refused to accept cuts to pension payments or public sector wages while the IMF has been pushing for deeper spending cuts, not just more tax rises. A key point of friction is a special benefit paid to some low-income pensioners, which creditors want scrapped. Creditors also want a wider VAT base; Greece says it will not allow extra VAT on medicines or electricity bills, and has also resisted calls for VAT hikes on hotels and restaurants. Athens wants a concrete commitment to debt relief, something its creditors are not offering.

The future of the European Union is clearly at stake. But increasingly, it is becoming much more than that. Geopolitics is not far away. Washington has been expressing concern about the effects of a Greek exit from euro on the global economy, but lately, US President Barack Obama himself has come out to put pressure on the Greek government by calling on the Greek prime minister to make “tough political choices”. Obama's intervention is underscoring fears in western capitals that Greece could be driven into the arms of Russia.

Leaving the euro could force Greece to seek Russian aid and that would entail a price. Though it is not readily evident if Moscow can bail Athens out given the scale of the crisis the latter is facing, Greece’s gravitation towards Russia is a possibility that the West cannot afford to ignore. Tsipras has already threatened European unity over Russia's actions in Ukraine by calling for an end to sanctions.

Moreover, Greece has a history of coups and there are fears leaving the euro could prove politically debilitating. Voters turned to Syriza amid dissatisfaction with traditional parties. If Syriza leads Greece out of the euro, or gets a deal deemed unacceptable, voters may turn even further from the mainstream, and towards Communist of right-wing parties.

Though Greece is a minor economy, if Athens does default, it could exit the eurozone, with possible repercussions for the rest of Europe and the world economy. This is not the kind of news global economy would welcome at a time when it is just about managing to get out of recession. It is for this reason that the world is watching the drama unfolding in Europe with bated breath. More than economics, it is the political factors which will shape the outcome of this crisis. At this point, it remains far from clear how this will end.
(The writer is Professor of International Relations, King’s College, London)