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What happens when an unstoppable force meets an immovable object? In ancient Greek mythology, when Zeus was confronted with this paradox in the form of an unstoppable hunting dog, Laelaps, and an uncatchable fox, the Teumessian fox, he resolved it by turning both animals to stone. In contemporary Greece, when the seemingly unstoppable Syriza government rammed into Greece’s immovable creditors, Prime Minister Alexis Tsipras simply sacked his Marxist finance minister Yanis Varoufakis and caved into his creditors’ demands.
Late in the evening of Thursday July 9, just four days after 61 percent of Greeks voted no to the terms of a bailout package that had been offered by its creditors, the Tsipras government submitted a package of economic reform proposals to its eurozone creditors that, initial accounts suggest, will impose more austerity than the terms of the package that voters so recently rejected. It turns out that when the banks are closed and the economy faces a cataclysm, voting no means voting yes.
The fact that the Tsipras government actually met a eurozone deadline and submitted a set of concrete proposals—after five months of failing to do so—bodes well for a resolution to the crisis. But given the acrimony and the deterioration of trust over the past two weeks, it remains far from clear that EU leaders will act decisively to save Greece when they meet this Sunday. In either case, Sunday’s summit will bring no end to the crisis. If member states reject Greece’s proposal, they will set the stage for Greece to crash and burn out of the euro and, in doing so, will unleash a new stage in the crisis. If they accept Greece’s proposal, they are likely to keep Greece on a financial drip feed, only releasing funds if and when the Tsipras government actually delivers on its promises.
It was just over 2,400 years ago that Greeks invented democracy, demagoguery, and theater. The three have rarely been so intertwined as they were last Sunday in Athens. Tsipras, displaying his skills as a radical leftist demagogue, organized an absurdist piece of political theater and billed it as an act of democracy. Unable to bend Greece’s creditors to his will and facing a default on Greece’s loans from the IMF, his government punted the problem to the people in the form of a referendum that asked voters whether Greece should accept a bailout package that was no longer on offer from creditors. The literal wording of the referendum was incomprehensible to most voters, and there was profound disagreement on the deeper meaning of voting yes or no.
The no vote changed very little. Greek voters renewed Syriza’s mandate, but it was still a mandate to pursue the impossible.For the Syriza government and its supporters in the no camp, a negative vote was a stand against austerity. A no was a rejection of the creditors’ ultimatums, blackmail, and fear-mongering, and it would strengthen Greece’s negotiating position besides. Tsipras’ government could then extract debt forgiveness and put an end to years of grinding austerity. A no would deliver all this, Syriza promised, while allowing Greeks to retain the euro as their currency—something that more than 75 percent of them wanted.
The yes camp, including opposition parties and many of Greece’s creditors, declared that the real choice was between keeping the euro or returning to the Drachma. A yes vote would unlock an international bailout and preserve Greece's place in the common currency, where a no vote would lead to a rapid exit from the eurozone and possibly from the EU itself. A yes vote would also be a repudiation of Syriza’s approach, possibly leading to new elections.
In the event, a sweeping majority of Greek voters said no to austerity. Tsipras declared it a victory for democracy and Varoufakis called it a holy moment. (The human rights watchdog the Council of Europe said that the conditions of the hasty referendum fell short of international standards, and an EU official said that the referendum was neither “legally nor factually correct.” Syriza supporters celebrated through the night, but on Monday morning they awoke to find that Greece’s banks remained shuttered.
Indeed, the no vote changed very little. Greek voters renewed Syriza’s mandate, but it was still a mandate to pursue the impossible. The Syriza government and the Greek people want—or at least claim to want—to remain in the eurozone and to end the conditions imposed by creditors in exchange for assistance. They can have one or the other but not both.
The creditors, too, have conflicting desires. They want to keep Greece in the eurozone to maintain the idea that Eurozone membership is irreversible. At the same time, they want Greece to obey the conditions of its bailouts to demonstrate that eurozone rules must be followed. The drama that plays out in the coming days will test whether the creditors can have both or must settle for one or the other.
If Greece wants to ignore eurozone rules and disobey its creditors’ conditions—however wrongheaded and destructive those conditions may be—it must be prepared to suffer the consequences, including a disorderly exit from the eurozone. If the creditors want to demonstrate that eurozone rules must be followed, they must be willing to allow Greece to default and exit if it persistently violates those rules. The one thing both sides have had in common over the past five years is their unwillingness to face up to these contradictions and to address them head on.
As European Council President Donald Tusk pointed out last week, there are no angels in the political game between Greece and its creditors. There are, however, plenty of sinners. The original sins date back to the eurozone’s founding, when leaders knowingly launched a half-baked monetary union without accompanying policies—above all, a banking union—necessary for its success. As Romano Prodi, who was European commission president, put it in December 2001, on the eve of the launch of euro banknotes, “I am sure the euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But someday there will be a crisis and new instruments will be created.” In other words, European leaders created a system that they expected would end up in crisis in the faith that the problems would be sorted out later. At the time, that may have seemed a clever strategy for the laudable goal of uniting Europe, but today, confronted by the catastrophe that incomplete monetary union has unleashed, we can see just how reckless that approach was.
EU leaders sinned again in responding to the eurozone sovereign debt crisis in 2010 and 2012. Governments in Germany, France, and other core countries faced a choice between bailing out Greece and other struggling peripheral governments or bailing out their own banks that were exposed to bad debt in those countries. Core governments found it more politically palatable to bail out debtor countries than to let them default (which, in turn, would have exposed core banks to failure). Eurozone leaders, in essence, transformed a banking crisis into a sovereign debt crisis and then imposed on Greece austerity policies so harsh that they were destined to shrink the Greek economy and thus prove self-defeating. Not only did the EU’s policies drive Greece into a depression, they also proved politically unsustainable, sparking the rise of extremist parties like Syriza and Golden Dawn.
But there is plenty of sin on the Greek side as well. For decades, successive kleptocratic governments in Greece wasted the EU’s generous funding to prop up their clientelistic networks and create a bloated, inefficient state bureaucracy. They refused to reform and modernize the Greek economy, and when the euro was launched they faked their statistics to qualify for membership. They squandered the opportunity provided by the euro, taking advantage of the low interest rates that came with eurozone membership to engage in reckless borrowing that ultimately brought the Greek economy to its knees in the aftermath of the eurozone crisis.
And the Syriza government has many sins to answer for. After four years of hardship, Greece had finally started to turn a corner in the second half of 2014, seeing two quarters of growth and a slight reduction of unemployment. In six months, Syriza has turned that budding recovery into an economic catastrophe. It has alienated its eurozone partners—calling them everything from Nazis to terrorists, demanding World War II reparations from Germany, cozying up with Vladimir Putin, and missing deadline after deadline for presenting credible reform proposals. And with the referendum, Syriza has made an irresponsible gamble: essentially threatening to blow up the entire Greek economy and betting that eurozone creditors would acquiesce before they let that happen. Syriza has overplayed its hand.
Over the past five years, eurozone leaders have put in place enough safeguards that they are confident that they can contain contagion from a Grexit. Events over the past fortnight have laid bare for any who doubted that, economically, Greece needs the euro more than the eurozone needs Greece. And politically, the other eurozone governments have reminded Syriza that the democratic mandate of one government does not empower it to force the hand of the other eighteen.