The election of an anti-austerity Syriza government in Greece signalled trouble for the powers-that-be in the European Union. Principally Germany which has no interest in rethinking how the EU operates, since it serves German interests so well, but also the most powerful European institution: the European Central Bank (ECB).
As of Saturday, June 27, it is clear what Syriza was up against. As Greek Finance Minister Yanis Varoufakis explained, the Eurogroup (finance ministers from the 19 countries that use the euro — collectively, the Eurozone) was never prepared to discuss the anti-austerity proposals put forward by Syriza and provide debt relief for Greece.
All that the Eurogroup membership intended was to extract from Greece a commitment to continue to practice austerity under the terms set out in existing agreements with the Troika (the EU Commission, the ECB, and the International Monetary Fund), and continue to pay down debt at the cost of shrinking the Greek economy — already smaller by 25 per cent thanks to austerity — further.
Led by German Finance Minister Wolfgang Schäuble, the European finance ministers ignored the two basic principles of public finance. One, if debts are too large to be repaid, they will not be. Two, any agreement with a debtor country must be acceptable to the citizens of that country.
Greek debts amount to some 320 billion euros, of which over 60 per cent is in bilateral loans (or contributions to the European Financial Stability Facility or EFSF) from Eurozone countries to Greece. The German share of these loans and contributions is 56.4 billion euros.
The Eurogroup ministers were unwilling to go back to national governments and parliaments for authority to aid Greece further.
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Instead, the Eurozone finance ministers were using the threat of calling these debts due to goad Greece into reducing pensions, de-regulating its labour market, and privatizing public infrastructure and services.
The Greek government refused to buckle under.
Recognizing that in order to implement an austerity program — when it had been elected to implement an anti-austerity program — the Greek government needed a mandate from its people, Syriza announced it would hold a referendum July 5, on the terms of the Eurogroup proposals.
At this point the Eurogroup withdrew its proposals, and announced the end of negotiations with Greece.
On Sunday, June 28, the European Central Bank decided to cap its lending to Greek banks, forcing Syriza to shut down the Greek banking system for a week.
The Eurozone debt holders have yet to explain why they pushed Greece to the wall, and now risk seeing the money owed them disappear in a Greek default.
Greece can default on its loan repayments to the IMF and the EFSF, and still remain in the Eurozone. In fact there is no legal mechanism or procedure for excluding a member country from the Eurozone.
In order for the wolves of the Eurogroup to make Greece drop out of the Eurozone, Greece would have to be expelled from the European Union itself, a course of action that European leaders (other than the German finance minister) have not envisaged taking to this date.
The Greek crisis reveals the political weakness of the EU, as well as the obvious shortcomings of its economic model.
The only European institution with any clout is the central bank. It has the power to reverse the Greek debt situation by buying up Greek debt and replacing every euro leaving Greece. It also has the power to force Greece to adopt a parallel currency, if it refuses to backstop the Greek banking system.
ECB President Mario Draghi famously said he would do “whatever it takes to preserve the euro.”
Bets are on whether the ECB will be forced by Germany and the Eurogroup wolves to abdicate its role as the lender of last resort to Greece, and end effective participation by Greece in the Eurozone.
The ECB, from its German headquarters, acting alone, has the power to decide if Greece leaves the euro, but not the political authority to do anything more than preserve the Eurozone intact.
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The sovereign nations that make up the European Union have failed to provide for an authority that can overrule national interests. Though it is in the obvious interest of all Eurozone members not to put Greece into default, neither the European Parliament or the European Commission have the means to act on behalf of the Eurozone.
The French, long the inspiration for European integration, have under Socialist President François Hollande as with his Conservative predecessor Nicholas Sarkozy, ceded the moral leadership of the EU to Germany.
The German economy runs large surpluses with the rest of the Eurozone. German banks lend the money back so that other countries can continue to keep Germany in surplus. This works for Germany but causes stagnation across Europe.
Greece and other deficit countries are being asked to undertake economic adjustments that should be undertaken by Germany and the other surplus nations.
At the heart of the Greek crisis is Germany being obstinate in defence of the European economic model which works for it, but not for the EU as a whole, and no other country or group of countries being able to lead Europe in another direction.
Syriza represented a challenge to the prevailing model, so it had to be stopped. The German grand coalition government has decided to teach Greece a lesson.
This crisis is to be continued.