Greece is falling out of Europe

The fundamental contradiction in Greece's desire to keep the euro while rejecting austerity is unsustainable, and the moment is fast approaching when the decision will be taken out of Athens' hands.

FT.com

The people of Greece have rejected austerity. You can scarcely blame them for throwing out a corrupt political establishment. It is also indisputable that the economic prescription written by its international creditors is astonishingly harsh. The problem is that anger is not a policy. As often as Greece votes against austerity, it cannot avoid it.

Greece is sailing between the Scylla of creditor-imposed depression and the Charybdis of the chaos of unilateral debt repudiation and exit from the euro. At this week’s election more than two-thirds of voters backed parties opposed to the spending cuts, tax increases and structural reforms imposed by the EU and International Monetary Fund as the price of a second bailout. Yet the same proportion of these voters also say that they want to keep the euro.

This fundamental contradiction is not sustainable. The moment is approaching when the decision will be taken out of the hands of the politicians in Athens. Financial deadlines are looming. The outcome of the latest poll – and the prospect of another inconclusive election in June – very much suggest Greece is heading fast towards the whirlpool of disorderly default.

The big losers from the election were the parties that have dominated, and corrupted, Greek politics for the past several decades – New Democracy on the centre-right and the Panhellenic Socialist Movement (Pasok) on the centre-left. Small opposition parties, from the Communists on the far left to the neo-Nazi Golden Dawn on the extreme right, saw their support surge. The big winner was Syriza, the leftwing party that pushed Pasok into third place. Alexis Tsipras, the Syriza leader, promises to tear up what he has called the "barbarous” demands of the EU and IMF.

A broken polity now sits alongside the broken economy. The lethal legacy of the old New Democracy-Pasok duopoly is a Balkanisation of politics that has left Greece without a governing majority – whether one for or against the present economic course. Some European policy makers have been talking hopefully about a protest vote – a cry of anguish that will be followed by a shift back to the establishment as Greeks take a cooler look at their predicament. Yet there is nothing to say that the next polls will deliver a different result.

You can see why so many backed Tsipras. New Democracy and Pasok commanded the corrupt and clientelist system that has ruined the economy and disfigured Greek society. For all the jibes in Berlin and beyond about Greeks retiring at 50 or refusing to pay taxes, austerity has already taken a heavy toll. Public spending has been slashed and wages and pensions have fallen by 25 per cent. Greece has lost a fifth of its economic output. Featherbedding has been replaced by sackcloth.

Public rage, however, does not provide answers. Greece can say no to Brussels and Berlin. It can thumb its nose at the apparatchiks of the IMF. If it so chooses, it can unshackle itself from the euro. What it cannot do is escape a reckoning. Inside or outside the euro, Greece cannot avoid the brutal adjustments needed to repair its public finances and restore international competitiveness. Simply writing off its debts and reclaiming the drachma would trigger economic collapse.

Greek politicians may be betting that the country’s creditors are bluffing: that, however much they insist otherwise, the EU and IMF could not afford an uncontrolled default in Greece. The latest cracks in the Spanish banking system have provided a timely reminder of the dangers of contagion to the eurozone periphery. The single currency’s firewall is still only half-built. Would Germany’s Angela Merkel really take the risk of a Greek exit that could herald the break-up of the eurozone?

There is indeed an important argument to be had about the balance between austerity and solidarity in the eurozone. There is a powerful case to be made that Germany has demanded too much too soon of the single currency’s peripheral economies. Fiscal retrenchment is becoming self-defeating. Even in Berlin we now hear hints that core euro members should make a contribution to restoring economic growth. Thankfully, all these debates have been reopened with the election in France of Franois Hollande.

Yet my sense from many conversations with dispassionate European officials and politicians is that Greece would delude itself were to it imagine that the new rhetoric of growth will allow it to put aside its commitments to fiscal rectitude and structural reform. The rest of the EU has run out of patience. Its dealings with policy makers in Athens are marked by a complete absence of trust and a deep pessimism about the capacity of the Greek state to reform itself.

There are economists who will say this is to the good: salvation for Greece lies in leaving the euro. The steep devaluation that would follow a return to the drachma would restore competitiveness. The mistake is to imagine devaluation would be painless. It would rather be an alternative way of cutting domestic living standards. As to disorderly default, the consequence would be the implosion of the country’s banking system and the end of access to international credit.

All roads lead to austerity. For Greece, though, there is more at stake than economics. The tragedy of its membership of the EU has been its failure to defy geography and redefine itself as a modern European state. Now, it is hard to imagine how Greece can remain in the single currency. But does it want to return to the Balkans?

Copyright The Financial Times Limited 2012.