The Greek government has agreed to a four-month extension of its existing bailout programme. Widely seen as a move away from the brink of a eurozone exit, Greece will remain under the surveillance of the EU Commission, the IMF and European Central Bank and continue to pursue most of the austerity measures committed by the previous government.
In return, it can expect to receive the remaining €7.2 billion of loan money under the programme, and its creditors have agreed to a slower pace of debt reduction. However, there is still plenty of scope for haggling about the detail of the ongoing conditions, particularly labour market reforms, and this could yet derail the agreement.
If no agreement had been reached then Greek government finances, already parlous, would further deteriorate. More bills would be left unpaid and foreign creditors might not all be paid on time. As a holder of Greek debt maturing in July, the ECB would have been unhappy. But there is a let-out which the ECB would have liked even less. The Greek government could have borrowed in the short term from its banks by selling them more treasury bills, as it did before in 2011. Not pretty, but the Greek government would have been able to get by.
The path to the exit
The much more serious consequence of not reaching agreement to extend the bailout would have been the prospect of Greece being pushed out of the euro.
At present, Greek banks are relying on emergency lending of €65 billion from Greece’s central bank, a figure that is rising by about €1 billion per day as depositors withdraw their cash to send abroad or to keep as euro banknotes. The ECB has stated that the continuation of this lending facility depends on Greece holding to the agreement with its creditors.
Starved of liquidity, Greek banks would not be able to continue paying depositors. Greece’s central bank might ignore the ECB’s instruction to cease lending to its banks, but this would make depositors even more fearful of losing their money, leading to more withdrawals and capital flight.
So, to make its instruction stick, the ECB would halt the supply of euro banknotes to Greece and prevent the clearance of foreign payments out of Greece through the euro system of central banks. Inevitably, the outcome would be the imposition by the Greek government of limits to withdrawals of euro banknotes from banks, and capital controls restricting amounts that can be sent abroad.
Expulsion would be complete when, no longer able to obtain euros, the Greek Central Bank resorted to printing its own currency. Then the Greek government would be able to pay its bills in home-made money.
How to stay in the club
The Germans and other eurozone countries do not want Greece to leave the euro. They would face large losses on their loans and expectations would be raised that other countries might leave, threatening the viability of the whole project. Then there is the geopolitical imperative: as the buffer state to the south-east of the EU, they want to keep Greece on side. Cold-shouldered by the EU, Greece would be vulnerable to approaches from countries to the east such as Russia.
But if Greece is to stay in the euro, its behaviour must be compatible with this position. That means showing a reasonable prospect of not being an everlasting burden on other euro countries. It is not just major creditors like Germany that demand this. Smaller countries such as Ireland and Latvia that have suffered greatly to put their finances in order do not see why they should keep bailing out Greece.
Will Greece be able, politically, to become a responsible member of the euro club? The prospects are not good. Thanks to higher inflation in Greece than other euro countries during the “good years” before 2007, Greece is still uncompetitive. Despite some efforts to root out corruption, break up cartels and collect taxes, these agendas are far from complete. It is not just austerity that has caused the Greek economy to shrink by 25% since 2007 and unemployment to rise to 27%. And even though interest rates on loans to the Greek government have been reduced and maturities extended, the debt will probably not be repaid.
Greece has been saved from expulsion for now, but it would be unwise to speculate on how long its euro membership can continue.