Tsipras, February 2015.Demotix/IndiPHOTpress. All rights reserved.Relations between Greece and Europe are at key turning point. Between Friday 19 June and Monday afternoon, 22 June, when the European Council meets in an unexpected summit, four things may happen. An agreement, a temporary compromise, a break-up between Athens and Brussels, or a deepening of the crisis.
The first possibility - the most desirable - is an agreement based on the proposal of the Greek leader Alexis Tsipras: end austerity, release the 7.2 bn.euros of planned European aid, start a radical debt restructuring. But even the most pliable EU leader, Jean-Claude Juncker, said on Friday: "I do not understand Tsipras” and “I have warned Mr. Tsipras many times he shouldn't depend on me being able to prevent a failure of the talks”. This is not exactly the way you would prepare an agreement.
The second possibility is that the talks this weekend will lead to an intermediate compromise: an agreement to drag along the talks, with bridging EU funds for repaying the 1.6 bn. euros owed to the IMF at the end of June. In the meantime, on Friday ECB’s Mario Draghi has provided 2 bn. euros in emergency liquidity assistance to Greek banks where the massive capital flight of past months has left no liquidity.
The third - and most likely - possibility is a radical break between Athens and Brussels. A first indication came from Mario Draghi on Monday 15 June: if the crisis were to deepen, we would enter into “uncharted waters" (he had already said the same on April 18). The turn of Pierre Moscovici, European Commissioner for the economy, came on Friday June 19: “We are now at the end of the game. It’s time we must act and decide. Not much time is left to avoid the worst. The situation is extremely serious and critical”. Even more explicit has been Donald Tusk, President of the European Council: “We are close to the point where the Greek government will have to choose between accepting what I believe is a good offer of continuing support, or head towards default”. But Europe’s proposal is a return to the past that Syriza will never accept. Alexis Tsipras - on Friday in St. Petersburg with Russian leader Vladimir Putin - quietly replied, "We are at the moment at the centre of a storm, but we are not scared of storms, we are ready to go to new seas to reach new safe ports”.
What type of break would it be? And how soon may it happen? There are three options. The less critical one is a default without exiting from the euro. Athens may announce that it will not repay the debt, – 80% of which is now held by European emergency funds, member countries, IMF and ECB, – nor will it pay interest. Freed from the burden of debt, Greece could at last breathe, public spending would stop being pocketed by finance, the economy could restart. If the ECB agreed to that, it would continue to provide liquidity to Greek banks, and would find a reasonable way to limit the damage of the write-off of the 322 bn. Euros of Greek public debt. The great advantage would be asserting the staying power of the euro and avoiding contagion: no room for speculation against the common currency. But this would amount to a victory of an indebted country, and to a political triumph for Syriza - a most dangerous precedent that Berlin could hardly allow to happen. The opposite alternative - an exit from the euro without default - would give Athens only disadvantages: devaluation and a mounting debt impossible to repay.
The last option is exit from the euro accompanied by default on public debt. The Eurozone and Berlin would get rid of the undisciplined member country, Athens would get back some control on its economic policy and return to the drachma, with an instant devaluation - perhaps by 40% or more. Debt will not be paid, financial markets would declare war on Greece, the economy may collapse, and then rebound. Berlin would feel relieved, but in Rome, Madrid, Lisbon and in the small countries of eastern Europe a nightmare would start: the spread in interest rates on public debt would skyrocket, financial markets would be betting on who will be the next one exiting the euro, speculation would be rampant. Unless the Eurozone provides all members with the guarantees that would have saved Greece and Europe from the start - mutualisation of debt, ECB actions to bring spreads to zero, a drastic stop to speculation on public debt.
How could this break unfold? First, there is a slowdown of tones, reassuring declarations on the stability of the euro and Europe, until banks and stock exchanges close on a Friday evening. Over the weekend, capital movements are suspended and - if the drachma comes back - banks are provided with freshly printed banknotes – perhaps coming from Moscow or Beijing. During the weekend – when markets are closed - the break is announced and on Monday the European Council ratifies the change, while swearing on the unity of Europe and the euro.
This is what has taken place in recent days and could happen at this very hour. Or all this is being prepared for next weekend, when payment to the IMF is due. Or maybe in the middle of summer, as happened with the end of the Bretton Woods system announced by Richard Nixon on 15 August 1971.
A crucial question is whether this break is agreed and smoothly organised by all sides - a consensual separation - or whether it is the result of a mounting political clash. In the first instance, Europe and the euro could survive; an impoverished Greece, but not oppressed anymore, could recover from the shock in a few months.
In the second case anything might happen. This is the fourth possibility - the most dramatic one – that would include no new proposal at Monday’s European Council, no "plan B", no agreement even on how to break links. Europe would hit the cradle where she was born; Greece would have a dramatic collapse of its economy; the West would start a political destabilisation against the Syriza government; contagion would go from country to country, from public debt to private debt, from banks to stock exchanges; Europe would be shattered.
There is still some space to avoid this worst-case scenario. And to listen to the reasons of Alexis Tsipras and of Greece - that are the reasons of democracy, in Athens as in Europe.