Jul 02, 2015 - 4:15pm

What’s Next for Greece?



Senior Director, European Affairs
Senior Director, U.S.-UK Business Council

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A pedestrian passes a graffiti damaged sign at the entrance to a main branch of the National Bank of Greece SA in Thessaloniki, Greece on Wednesday. Photo Credit: Konstantinos Tsakalidis/Bloomberg

Athens this week has been a near-constant source of confusion, deception and gamesmanship. The appearance of minimally-controlled chaos is creating waves across the global economy and making headlines worldwide. The fact that earlier this week the government of Greece missed its $1.7 billion payment to the IMF was generally expected, but it is still historically noteworthy. IMF Managing Director Christine Lagarde has notified the board that the country is officially "in arrears" on its payments, meaning Greece is the only developed country to ever default on its debt to the IMF.

This conclusion is the fault of the Alexis Tsipras government, although it cannot be blamed for the predicament the government is in -- the vast majority of Greek debt was taken on by predecessors who merrily used the money flowing into Greek banks from the rest of Europe, at the bargain basement interest rates enjoyed by Germany and other eurozone countries.

This is a key point in this saga: The EU's Single Market and the euro succeeded in channeling surplus savings from "Old Europe" to the younger periphery of Europe as a way to generate income for the older North. Unfortunately, lenders failed to do due diligence in how those funds were being used across the South, especially in Greece.

The true culprit in this mess has always been the zero risk weighting on loans to governments, which made it easy for Greek banks to finance government consumption rather than to seek out Greek entrepreneurs who would invest the funds for future growth.

As it became clear the government couldn't honor its obligations to the banks, the IMF, ECB and EU member state governments essentially bought the bank loans and became the creditors to the government of Greece.

In its dealings with these creditors (formerly known as the Troika), the Tsipras government attempted to duck any reforms that would improve its prospects of eventually repaying their debts.

Unfortunately, Prime Minister Tsipras and Finance Minister Yanis Varoufakis, who spent years as a university professor specializing in game theory, made a fundamental mistake: They saw the negotiations as an Athens-Brussels game they could win if they pushed back hard enough. Tspiras’ government seems to have forgotten that Spain, Portugal, Ireland and even Italy have a strong political stake in the outcome of the negotiations. Rewarding Athens for its intransigence and unwillingness to implement difficult reforms would only strengthen domestic opposition. The government in Athens was always destined to fail.

The letter Tsipras sent to Brussels earlier this week as a last-minute plea for support said it all. Rather than saying anything about fulfilling obligations under the current assistance package, Tsipras just asked for more money to pay the IMF and other loans coming due in the next two years. The letter, which was sloppily written with multiple fonts indicating where others changed Tsipras’ draft, was an affront. That the EU rejected it was no surprise.

It seems almost inevitable that the government of Greece can and will eventually get a deal to restructure its debt. At this point, debt forgiveness is the only viable way to exit the trap that Greece finds itself in. But it also appears increasingly unlikely that it won't be the Tsipras government that benefits. If, as is expected, Tsipras’ grand referendum gamble fails, and the people vote “yes” to accepting the creditors’ deal in an attempt to shore up the certainty of continued eurozone membership, Tsipras will have to resign. He has already said that while he will respect the democratic will of the people, he will not be the one to implement the reforms he has campaigned against for so long.

The people of Greece are beginning to recognize that Tsipras’ negotiating tactics have failed. They are also accepting the fact that their government needs to live within reasonable means and cannot rely on outside assistance forever. Reforms are the only viable way to restart growth, attract much-needed foreign investment and create jobs.

For us at the U.S. Chamber, that will be our mission moving forward in Greece. While the government will need to shrink, the Greek economy can and will grow if the spirit of free enterprise is allowed to flourish again, aided by labor market reforms, privatization and debt forgiveness.

This isn't as far-fetched as it sounds: The black market has long been a mainstay of economic activity in Greece (estimates of around 25% are commonplace), and the McKinsey Global Institute released a report in 2012 of the eight sectors — including tourism, energy, manufacturing and medical tourism — that could drive economic growth.

In the end, it will be up to the Greek government to let this capacity flourish. Our role will be to support that approach and underline the part of the private sector in fostering a sustainable recovery in Greece to benefit citizens across Europe and around the world.

Peter Chase is a Vice President of European Affairs at the U.S. Chamber of Commerce, based in Brussels.

Garrett Workman is a Director of European Affairs at the Chamber, based in Washington.

About the Authors

About the Author

Peter H. Chase was formerly Vice President for Europe for the U.S. Chamber.

About the Author

Garrett Workman
Senior Director, European Affairs
Senior Director, U.S.-UK Business Council

Garrett Workman joined the U.S. Chamber of Commerce in June 2015.