Having One’s Cake and Eating It

The Greeks do not — indeed cannot — pay their debts and yet they do not want to leave the euro. Something has got to give

Brendan Simms

Greek Prime Minister Alexis Tsipras 

The secret to life, Cedric Hampton explains in Nancy Mitford’s Love in a Cold Climate, is “having one’s cake and eating it”. Remarkably, he achieves the impossible. Through a distant provincial cousin (from Newfoundland) Cedric not only inherits the enormous country house of Hampton as the sole surviving male heir to his uncle Lord Montdore, but also all of his money on account of Montdore’s daughter Polly marrying the ageing, penniless, bi-sexual lecher “Boy” Dugdale, and being cut out by her parents. He charms both Montdores, reconciles them to Polly, seduces Boy, thus allowing Polly to escape into the arms of the equally elderly but more suitable Lord Paddington, and holds on to his inheritance seemingly unresented by all.

It is some way from a mansion in 1930s England to Athens in 2015, and yet Cedric Hampton has found an emulator in the Greeks. They do not want to pay their debts, and indeed cannot do so, and yet they do not want to leave the euro, which is what pure economic rationality would dictate, as they would then be able to default, re-introduce the Drachma and grow their way to prosperity on the back of a weak currency. The Greeks want somebody else to pay. Far from embracing the cause of full Eurozone political integration and thus the end of all sovereign state in return for the creation of the Eurobond which alone can settle their problems, and those of many others across the Union, the Greeks assert their independence and nationalism at every turn. They wish to have their cake and eat it, as we all do, needless to say. The world is about the see whether this feat – so effortlessly achieved by the fictional Cedric – can be effected in real life.

We have, of course, been here before, in 2010 and again in 2012, when Greece appeared on the verge of default. On both those occasions, she was “bailed out” by the EU, and some of her debt written down, in return for the adoption of reforms. These compromises made sense for Greece, because she was still running a high current account deficit, and needed massive transfusions of bailout euros to maintain government, before even a single loan was repaid. Likewise, Brussels was too conscious of the danger of contagion from sovereign debt default spreading across the southern periphery, as Spain, Portugal and even Italy’s creditors recalculating the status of their loans. Nor were the “core” European governments who grudgingly supported the bailout, especially those of France and Germany, entirely confident that their own rickety banks would survive the fallout of a Greek collapse. The underlying thinking was a blend between the old nuclear deterrence doctrine of mutually assured destruction, and the mysteries of the Y2K computer bug, with its potential for havoc mesmerising many before the millennium, before turning out to have been a false alarm.

Now, the situation on both sides is different. Thanks to the outgoing administration, the Greeks have achieved a “primary surplus”, that is the state takes in more in taxes than it pays out before servicing the debt. In theory, this might allow the new Greek premier, Alexis Tsipras, to announce a unilateral moratorium on debt repayments, and yet remain in the euro, secure in the knowledge that government spending could be maintained if Brussels terminated the bailout. On the Brussels side, a whole raft of new instruments have been put in place to deal with sovereign default, quantitative easing is now possible, the banks have been repeatedly “stress-tested” and patience with Athens has worn thin. There is also no governmental appetite appetite in northern Europe to explain to electorates why they are sinking yet more money into Athens. Moreover, any further leniency would invite demands from the Irish and other countries subject to, or recently exited from bailout programmes, for comparable relief.  This explains Chancellor Merkel’s recent remarks to Der Spiegel that a Greek departure from the Euro, the dreaded Grexit which she had tried for five years to prevent, could now be countenanced with some equanimity.

One way or the other, the current position is extremely dangerous, because common assumptions about the workings of the European system have been eroded, trust has frayed and tempers have reached boiling point. The assumption that a Greek default can be contained may be unsafe; like the y2K bug, only reality and not a simulation will tell us for sure. Bank failure across Spain, Italy and Portugal, possibly reaching as far as Paris, remains a distinct possibility.

Mr Tsipras’s gamble is the greater one, however. Whatever the paper balances of his state finances, he may find it difficult to find enough physical euro notes, especially in a cash-fixated economy such as Greece. There would be none of the EU emergency transfusions which restocked bank-machines during the crisis in Cyprus. Bank runs and pandemonium at dispensers would be the inevitable result. Moreover, Greece’s primary surplus will soon evaporate. Many citizens have already begun to withhold taxes in anticipation of the change of course promised by Tsipras. If he wants to balance the books without the bailout billions he will have to demand sacrifices, and extract taxes, on a scale which far exceeds the oppressions of austerity.

The irony in Greece, therefore, is that the discipline and self-reliance needed to defy Europe and re-establish national independence are the very qualities which would have made them better members of the common currency in the first place.

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