Eurozone - Brace for impact

Greece is on the way out of the eurozone and may be of the European Union. Trusting the Prime Minster Tsipras’ assurances, Greek voters overwhelmingly voted for two contradictory choices in last week’s referendum: against austerity and for Greek membership of the euro. However, the two parts of this mandate, rightly or wrongly, have turned out to be incompatible. Membership of the euro demands sacrifices (i.e. austerity and structural reform) for an uncompetitive economy operating in a badly designed single currency with no common fiscal policies, nor common political institutions. Excruciating austerity made the Greeks identify the euro with economic misery, while the political system and organized interests have either opposed or at best grudgingly accepted reforming a clientelist state and a protectionist economy.

The recent referendum in Greece (in which roughly 2 out of 3 voters said ‘no’ to a bailout proposal involving more austerity and structural change) has made it difficult for Greek Prime Minister Tsipras to compromise with creditors. If he really wanted a better deal for Greece, he should have never called the referendum in the first place. Now, for his proposals to form a sound basis for negotiations with creditors, who narrow-mindedly stick to harsh austerity demanding unrealistic primary surpluses and refusing to consider seriously debt relief, Tsipras needs to accept austerity, especially if a commitment to debt relief is given to him. But austerity is what emphatically Greek voters rejected. He has imprisoned himself into a paradoxical situation. 

All along, both players (Greece and its creditors) have refused to see the big picture – the protection of the eurozone. Like in a prisoner’s dilemma game, nobody wants Grexit but, sadly, this is what their actions will most likely bring about. Brace for impact.