The crisis in Greece is a political crisis. More precisely, it is a political crisis with severe economic consequences.
The economic aspects of the crisis are easy enough to see. Greek banks are going to run out of money in two days. If they do, the banks will fail and the Greek economy will collapse. What happens next is anyone’s guess, but none of the scenarios are easy and all of them involve economic pain and suffering.
The European Central Bank
The only institution that can prevent a bank failure in the short term is the European Central Bank (ECB) through a program called Emergency Liquidity Assistance (ELA), in which the ECB provides solvent institutions that are facing “temporary liquidity problems” with emergency funds. The ECB has been providing ELA to Greek banks over the past couple of weeks, but the money will run out on Wednesday and the ECB does not plan on providing any more emergency assistance.
The ECB decision not to provide more ELA is a political decision, and not an economic one. Were there no political crisis between Greece and its debtors, the short-term actions of the ECB would be clear: provide Greek banks with enough capital to prevent their collapse during the acute phase of the economic shock.
The ECB has not done this (yet) for two political reasons: first, the economic crisis in Greece has been caused by an ongoing political crisis. Without a resolution to the political crisis, the economic crisis will persist indefinitely. The ELA was not meant to be a medium- or long-term tool. And second, I suspect that the ECB is using the withholding of ELA funds as a tool to force Greeks back to the bargaining table. The unspoken implication is “play by our rules, and we won’t let your banks fail.”
It has been clear for quite a while that the economic solution to Greek’s problems involve some form of debt cutting as while as short term economic relief. This isn’t just my opinion, it’s what the IMF, one of Greece’s largest creditors, concluded in a secret internal paper. But the IMF is not taking its own advice, and its president, Christine Lagarde, has been quite adamant in refusing to consider cutting Greece’s debt load. So has the rest of the European creditors, including Germany.
Instead of debt cuts and fiscal relief, Greece’s creditors have demanded tax raises and primary surpluses. This is the exact wrong way to react to an economic crisis, as Paul Krugman has written many times.
European policymakers aren’t stupid and they aren’t economic neophytes. They know what the economic solution to Greece’s problems is, but they’re not doing it. And they’re not doing it because of political considerations. They don’t want to give in to Greece, because they don’t want individual European countries to be able to dictate the rules governing the entire community.
Struggle for Power
At its base, what’s going on is a struggle for power. On the one side, the European creditors are fighting for the power to enforce European fiscal rules on national governments. On the other side, the Greeks are fighting for the power of fiscal self-determination.
The logic of the Europeans is that following the rules is a condition of membership in the European Union. Individual countries cannot arbitrarily change the rules whenever they want, in the same way that citizens anywhere cannot choose to obey some rules and disregard others. That is not how a community works, and that is not how European leaders want the European Union to work. This is a political argument, not an economic one.
The Greek logic is that the European rules don’t work. At least, they haven’t worked for Greece. And if the rules of the EU aren’t working, then they should be bent in order to prevent further suffering by the Greek people. If Europe refuses to compromise, then perhaps a Greek future outside of Europe, in which it can determine its own fate, is the best choice. This, too, is a political argument more than it is an economic one.
What we’re left with is a political crisis that is leading quite rapidly to an economic catastrophe.
I don’t know who is “right” in this situation. I hate the idea of the European Union falling apart. The Europeans have achieved much over the past decades, and it would be an enormous failure on everyone’s part should Greece leave. That failure would be magnified exponentially if Greece’s leaving leads to a disintegration of the EU as a whole.
And yet, I empathize with ordinary Greek people who cannot accept that Angela Merkel, whom they did not elect, is now determining their economic future. Wouldn’t you be frustrated if the leader of a foreign nation held so much power over you? Even if Chancellor Merkel and her colleagues are correct, isn’t the situation politically and democratically intolerable?