How Greece went from victory to economy-destroying defeat

By Matt O'Brien July 10 at 4:41 PM

Greece thought it had leverage when it had none, and, as a result, it's crippled its economy even more than it already was for nothing.

That's the simple story after Greece offered to meet almost all of Europe's demands in its latest bailout bid. The key word there being "demands." Greece thought it could negotiate with Europe when it was really being told what to do, but now knows it has no choice but to comply if it wants to stay in the euro zone—which it does. So that's why Athens is proposing a deal that's almost the same as the one its voters just rejected in a referendum. Although even that might not be enough. While it's true that France has come out in support of Greece's latest offer, Germany has been conspicuously silent. Greece might have to cut its budget more than it's already saying it will and take money from people's bank deposits to win Berlin's approval. The bottom line, though, is that the referendum didn't give Greece more bargaining power, like the government said it would, and and now Athens will have to do as much austerity as before, and possibly more.

This isn't even a Pyrrhic victory for Greece. It's a Pyrrhic defeat.

Greece got to this point because it believed what was either a lie or a misconception. That was the left-wing Syriza party's promise that it could end austerity without ending Greece's euro membership. This was not true. Why not? Well, because Europe has total power over Greece, and Greece has no power over it. Greece's banks rely on emergency loans from the European Central Bank to stay afloat—loans that would be cut off if Greece's government doesn't do what Europe wants. That would leave Athens with bankrupt banks that would either need to be bailed in by taking money from depositors or bailed out by leaving the euro and printing the money that was needed. And this was not a bluff. The ECB actually did pull enough of the plug on Greece's banks after the referendum was announced that they had to close for now, but not so much that they had to close for good. That made the threat clear enough.

But wouldn't it also be a disaster for Europe if Greece left the euro? And doesn't that mean Europe would do just about anything to avoid it? Well, no, not anymore. Five years ago, this might have been another Lehman Brothers, but now it'd just be a bad day or two for the markets. That's it. The French and German banks that had lent it money were indirectly bailed out the first time Greece was, so the panic wouldn't spread to the financial system. And the ECB has begun buying other countries' bonds and promised to buy as many as it takes to keep their borrowing costs low, so the panic wouldn't spread to Spain or Italy's debt markets either. The panic, in other words, wouldn't spread at all. It would just stay in Greece. What Syriza had thought was a game of mutually assured destruction was actually one of single assured destruction—and Europe knew this. That's why it could afford to be relatively blasé about kicking Greece out of the common currency today.

Syriza's strategy, insofar as there was one, couldn't have been much more of a failure. Its brinkmanship has created so much uncertainty that Greece's economy has started to shrink again, which will only get worse now that the banks are closed. That last part is the economic equivalent of a heart attack: businesses can't get the credit they need to, well, stay in business, and so have no choice but to lay people off. And what has Syriza gotten for all this? Nothing, and maybe less than that. Not only is Greece going to have to accept austerity on Europe's terms, but it also might have to do more than it would have before to make up for the fact that its economy is in worse shape now. In other words, the tax hikes and spending cuts that would have produced a 1 percent surplus before won't now, and the banks that had been fine might need to be recapitalized now. So it wouldn't be surprising if Germany says Greece needs to do even more austerity and take money from people's deposits to get a deal now.

So Syriza has incurred a lot of the costs of leaving the euro—like a financial crisis—at the same time that it's kept the costs of staying in the euro. There have been no benefits. Sure, Europe might offer the fig leaf of future debt talks, but that was one it'd already given Greece in 2012. The only thing that's changed is Greece is worse off than before. Indeed, it's hard to see how Greece will grow now that it's just promised to do more austerity every year and is stuck in a currency that's too expensive for it. The real mistake was to bluff about leaving the euro when neither Syriza nor the Greek people wanted or were willing to do it. That's left their economy in a slightly bigger hole, with maybe more austerity, and no way out.

It's an appropriately Greek tragedy that its anti-austerity party is now all but begging for the chance to do austerity.