Greece Continues Game of Chicken with EU Creditors
Business + Economy

Greece Continues Game of Chicken with EU Creditors

As time ticks down toward the end of the current deal between Greece and its creditors, both sides remain fixed in opposing positions that, if they stay unchanged, appear certain to drive Greece out of the European Monetary Union. It’s an endgame nobody wants, but with Greece demanding an end to many of the austerity programs forced on it as part of two bailouts, and its creditors demanding that Athens toe the line of those previously negotiated deals, it was unclear late Sunday who — if anyone — would budge first.

The question takes on an element of urgency Monday, when European finance ministers convene again to try to settle on a solution to Greece’s troubles before the current financing arrangement expires at the end of the month.

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Greece’s Prime Minister, Alexis Tsipras, was elected last month on a promise to do away with the deep cuts on social spending required by the so-called “troika” of lenders that bailed his country out: the European Central Bank, the International Monetary Fund and the European Union. He has continued to insist that, rather than renewing the current package of loans and reforms, Greece is granted a bridge loan free of onerous requirements that would see it through the next several months and allow a new deal to be struck.

He and his finance minister, Yanis Varoufakis, have also suggested that the European countries holding Greece’s debts should consider writing down the principal, effectively forgiving part of the loan with no payment at all.

Much of the leadership of Eurozone countries holding Greek debt — notably Germany, the Netherlands, France and others — have been cool toward the Greeks’ demands. German Finance Minister Wolfgang Schaeuble said last week that there was, in effect, nothing to talk about, and that if Greece declined to renew the current deal, “it’s over.”

Varoufakis last week appeared to be giving some ground, telling a meeting of his fellow finance ministers that Greece wasn’t demanding that 100 percent of the fiscal reforms forced on it be rolled back. He said that his country’s new government viewed only about 30 percent of the required reforms as “toxic.”

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As lower-level talks continued over the weekend, however, the scope of the Greeks’ demand apparently widened, according to The Financial Times, making a deal harder to envision.

There is a strong current of thought in the financial world that holds that the austerity measures forced on Greece truly are unduly harsh, and are perhaps limiting the country’s ability to grow its way out of the economic hole it currently inhabits. For instance, the agreement with its creditors requires Greece to double its primary budget surplus (meaning a surplus before interest payments) to 3 percent this year and increase it to 4.5 percent next year.

Writing on his blog, economist and New York Times columnist Paul Krugman said that the damage to the Greek economy by the financial crisis rivals that done to the German economy by the loss of World War I. Germany, of course, was forced to pay massive and economically debilitating reparations, which hamstrung its economy for half a generation and gave rise to the anger that swept the Nazis to power.

Nobody is claiming that Greece is in danger of becoming an aggressive military threat to its neighbors, but Krugman and others have argued that leniency toward Athens would actually benefit not just Greece, but ultimately its creditors.

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“Austerity, it turns out, has devastated Greece just about as much as defeat in total war devastated imperial Germany,” Krugman wrote. “The idea of demanding that this economy triple the size of its primary surplus is … disturbing.”

At the same time, Greece isn’t the only EU country that needed bailouts in the aftermath of the financial crisis of 2007 and 2008, and the terms of its bailout already look pretty favorable compared to other troubled European economies, including Spain, Portugal, Italy and others. Granting Greece further relief will virtually guarantee similar requests from other EU countries facing similar problems.

It not an enviable choice, and at the moment, it’s unclear which direction Greece’s creditors will take.

“I expect difficult negotiations; nevertheless I am full of confidence,” Tsipras told reporters over the weekend. “I promise you: Greece will…in six months' time, be a completely different country.”

There are many ways in which Tsipras could be right. They just aren’t all good.

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