Fears that Greece would default on a 750 million euro payment to its creditors tomorrow, sending it one step closer to a forced withdrawal from the European currency union, appear to have been overblown. But the long-term prospects for Greece are not promising, creating more uncertainty in a European community that is also struggling to understand the impact of the recent British elections on its political union.
Greece’s Yannis Varoufakis, heading into yet another meeting with his fellow European finance ministers, said Monday that there should be no concern about Athens making the payment scheduled for tomorrow. “Our standard answer is that Greece will always meet its obligations to its creditors and obviously we are doing this tomorrow again,” he told reporters.
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However, the ability of Greece to pay what it owes tomorrow is only a small part of the worry. With its current bailout arrangement ending in June, the government in Athens is running out of cash and has far larger payments coming due this summer.
The ongoing crisis in Greece has strained the ties between the members of the currency union at the same time that the British government is causing concern about the larger political union of the EU. David Cameron’s conservative government won another term but did so promising a referendum on whether the U.K. should remain part of the European Union.
A British vote on its exit from the EU would not likely take place until at least 2017, but it will no doubt create significant worry in the markets and embassies as advocates of a “Brexit” press their case loudly, and British Conservatives use the prospect of the U.K.’s departure to wring concessions on trade from the rest of Europe.
The crisis in Greece, though, is more immediate.
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Hit far harder than most of Europe during the recent recession, Greece has relied on bailouts from other European nations, as well as the European Central Bank and the International Monetary Fund, to pay public employees and pensioners and meet other expenses. However, the bailout agreements came with strict belt-tightening requirements, which many believe have caused not only economic stagnation but significant suffering for the Greek people.
Varoufakis’s party, Syriza, was elected earlier this year on promises by now-Prime Minister Alexis Tsipras to do away with austerity policies. The problem, of course, is that the lenders who put the austerity requirements in place are not willing to keep supplying Athens with cash if the government refuses to abide by spending limits.
The finance ministers of the countries that share the Euro have been battling for months to come up with a plan that can satisfy both hawkish lenders, like Germany, that want Greece to balance its books, and the new Greek government, which cannot politically accept a deal that doesn’t demonstrate substantial easing of the austerity measures the Greek people so detest.
The endgame for Greece runs the gamut from a deal that is somehow acceptable to all parties to an outright default and exit from the currency. Middle-of-the-road options include strategic default on specific obligations and an agreement by other Eurozone countries to allow Athens to remain part of the currency union.
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Despite the hard line many European countries are taking with regard to Greek austerity, there is significant incentive to keep Greece onboard. Market confidence in the Eurozone could be significantly undermined if investors come to see membership in the currency union as something that countries can abandon in tough economic times.
The current Greek government is well aware of those incentives, which is why it appears willing to push each stage of the bailout negotiations to the brink.
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