Greece and Europe enter uncharted waters

Greece and Europe enter uncharted waters

Greece has voted “No” to its international creditors’ bailout proposal, supporting the left-wing Syriza Government in a high-stakes referendum.

The Sunday poll, in which Greece voted “No” to its international creditors’ bailout proposal, showed a clear rejection of creditor terms: 61% voted “No,” and just under 39% voted “Yes.” What this result will mean politically, however, is a rather more open question.

One reason has to do with the main actors of the German elite who seem to have presented a conflicted and confused response to the result. For instance, the German Vice Chancellor Sigmar Gabriel told the Tagesspiegel newspaper that “the Greek Government is leading the Greeks on a path of bitter sacrifice and hopelessness.” Yet Germany’s hardline finance minister, Wolfgang Schaeuble, stated rather surprisingly that Greece could exit the eurozone “temporarily.”

Similar cautious remarks were also reiterated by the German foreign minister Frank Walter Steinmeier, who stated in Tagesspiegel am Sonntag that a Grexit would be a “disastrous signal to countries outside the European Union.”

Angela Merkel on her part made no public statements, yet her awareness of the negative geopolitical consequences of a Grexit is well-known.

The Chancellor is also aware of the fact that a Grexit will end the dream that eurozone membership is irrevocable. But again, how Germany’s leadership especially Angela Merkel will respond is still a puzzle, despite the Chancellor’s track record on managing the passing of unpopular legislation. This last point is especially relevant in case Greece requires a new bailout.

But there is another reason behind the uncertainty. If Greece exits the euro, it will most likely be what the Economist Intelligence Unit calls a “de facto” exit as opposed to a de jure exit. A de facto exit means that a “No” vote would increase the likelihood of Greece defaulting on the ECB on July 20th.

Greece would then be cut off from the ECB’s ELA program, default on private creditors, and issue a parallel currency which will circulate alongside the euro. With an increasing need to print domestic scrip, Greece will have exited the monetary union, at least in de facto terms.

Such a scenario can be reversed, since it is up to the Greek government to set a conversion rate between the euro and the scrip and re-denominate contracts. Consequently, whether Greece will be in or out of the euro will be an open question.

Yet the uncertainty does not end here. Even if a de facto exit occurs, Greece would continue to be legally (de jure) a member of EMU, and may face significant uncertainty over its status. This is due to the fact that the nation could use treaty provisions to argue that it was illegally forced out of the euro by its peers, while its peers could accuse Greece of violating treaty provisions by issuing a parallel currency.

Consequently, the legal debate will be protracted and its outcome will be highly uncertain, to say the least.

In conclusion, if there is one concept that sums up the road ahead for Greece and Europe it is that of uncertainty. The latter is even more true due to the current polarized nature of Greek politics. Such polarization will embolden the radical voices within Syriza to harden their stance towards Tsipras, and by consequence his stance towards the creditors.

Categories: Europe, Politics

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