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Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint

Europe’s steady slide towards Grexit

At the heart of the crisis is the Tsipras govt's inability to meet challenges

Greece is just one step away from exiting the euro zone after European finance ministers rejected the Greek government’s request to extend the bailout programme. The Greek government had demanded an extension until the country carries out a referendum on the demands made by its creditors on 5 July. The move towards an exit—which is likely to be disorderly for Greece—may start this week.

Tuesday is an important day in this respect. It marks the deadline for Greece to pay a sum of $1.7 billion that is due to the International Monetary Fund (IMF). Tuesday is also the day when the bailout plan for Greece expires, unless it is renewed. European authorities anticipate that Greece may have to impose capital controls to prevent currency flight and probably very soon. In fact, Greece may need help from Europe if it is to successfully impose capital controls.

While efforts are likely to continue until the last moment to push for a deal, increasingly this appears to be too difficult a goal to reach. The immediate reason for this scepticism is that after innumerable rounds of negotiations, Greece is nowhere close to agreeing to what its creditors want. The basic demand of the creditors—institutionally represented by the European Commission (EC), the IMF and the European Central Bank—is to raise the country’s primary surplus for the next two years. The Greek government wants this condition to be relaxed and promises to have a higher primary surplus from 2017 onwards. Attaining this goal faster—in the next 12 months—requires a cut in pensions among other things. The government of Prime Minister Alexis Tsipras came to power in January promising an end to austerity. For it to agree to this demand of the “troika" will be close to committing political suicide.

The negotiating stance of the Tsipras government over the past five months has made this clear. Pensions are one redline the Syriza government is unlikely to breach. In a 31 May article in Le Monde Diplomatique, Tsipras made that amply clear.

All this has deepened mistrust of Greece among European negotiators. The surprising decision to go in for a referendum on 5 July was the proverbial last straw. The referendum was a political strategy to force the hands of the creditors. It backfired badly.

On paper it looks as if Greece has a win-win deal in case it exits the euro zone. After all it can simply default on its debt obligation of €317 billion—180% of its gross domestic product. By reverting to its old currency, the drachma, it can regain competitiveness and export its way back to economic health.

This is unlikely to happen. If Greece forcibly converts its euro-denominated assets and liabilities overnight into ones based on the drachma, a sharp drop in their value against the euro is a foregone conclusion. Once the drachma falls in value—as it certainly will—the prices of imports will rise very fast leading to a spike in inflation. This situation has been seen before in case of such “divorces" and the process is painful and prolonged. In any case, the exit from euro zone is a process and not a one-step move away to an independent nation-state. This is not a recipe for economic revival, as the Greek government seems to think, but one for a further economic decline.

Greece’s problems are structural. The cronyism of its banking system, its weak administrative system and an inefficient public sector coupled with oligopolies in the private sector. It is not the pensions that are a roadblock on the way to reform but the inability of the Tsipras government to meet these challenges upfront that is at the heart of the Greek crisis. A divorce from Europe won’t resolve any of these problems but will magnify them.

Will an exit from the euro zone help Greece’s economic recovery? Tell us at views@livemint.com

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