Time is running out for Greece and its official creditors to reach an agreement that might keep Greece in the euro. Yet neither the Greek government nor its official creditors are showing very much flexibility to bridge the large gap that separates them on the issues of debt reduction and of appropriate economic policies for Greece. This has to raise the very real risk that Greece might be forced out of the Euro well before year-end.
Since assuming office on Jan. 26, the new Greek government has shown little sign of backing off from the radical policy positions that it took during the election campaign. Indeed, it refuses to ask for an extension of its European Union stabilization program, which is due to expire on Feb. 28, while Yanis Varoufakis, its outspoken new minister of finance, has presented a variety of debt exchange options that he must know are wholly unacceptable to Greece’s European partners. More disturbing still, the Greek government is now readying itself to introduce a slew of parliamentary measures early next week that will worsen its public finances and partially reverse key economic reforms under its troika agreement.
{mosads}For its part, the German government is leaving little room for doubt that it will not brook any notion of official debt reduction. At the same time, it insists that Greece must honor its earlier European commitments with respect to the issue of budget austerity and structural economic reform. Meanwhile, the European Central Bank has reminded the Greek government that its patience with Greece is wearing thin and that it does not intend to indefinitely support the Greek banking system unless the Greek government shows clear signs of progress toward reaching an agreement with the troika.
It would be comforting to think that what we are seeing now are only opening negotiating positions and that common ground will soon be found. However, with both sides knowing the clock is ticking and that the Greek banking system continues to hemorrhage deposits at a disturbing rate, one has to wonder whether the lack of movement in the negotiations might not reflect the strong constraints on both of the two parties to make meaningful concessions.
Sadly, it is all too possible that the Greek government is fearful of making the large policy U-turn that it needs to make to secure an agreement with the troika for fear of splitting Syriza, the ruling party, and for fear of deeply disappointing its electoral base. It is equally possible that Greece’s official creditors are not only worried about their electorate’s reaction to their being too generous with Greece, but that they are also concerned about the message that such generosity might send to the rest of the European periphery. If concessions are granted to Greece, how can they be denied to Ireland, Portugal and Spain? Further, if the Syriza government is seen to have wrung out concessions from the troika, might this not boost the chances of Podemos, an extreme-left and anti-European political party, in the Spanish parliamentary elections scheduled for the end of this year?
Yet a further factor inhibiting any movement in Greece’s official creditors’ position is the growing conviction that Europe today is in a much better position than it was in 2012 to withstand a Greek exit. They base this conviction on the fact that most of Greek government debt is now in official rather than private hands and that Europe now has in place the financial mechanisms that might allow it to ring-fence the rest of the eurozone from any fallout from a Greek exit.
In any negotiation, it is helpful if both sides display flexibility and try to understand one another’s situation. Sadly, this does not seem to be the case with Greece and its official creditors. This has to suggest that it might not be too early for European policymakers to start making contingency plans for a disorderly Greek exit from the euro, especially considering the likely contagion that will flow from such an event.
Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.