Greek Debt Breakthrough

As talks between the EU and Greece intensify, many have started to question whether the two can cut ties without substantial economic and political consequences. The impasse has been going on for five months, but the talks are coming to a head. By the end of July, Greece must repay €1.6 billion to the International Monetary Fund (IMF). Greeks have started to run on banks fearing that local banks may dissolve their savings, rendering them unable to remain liquid. However, it seems as if Greece’s economic minister, Giorgios Stathakis, has proposed new tax policies that may bring about an agreement.

Athens and the EU, specifically German creditors, have traded nasty blows in the process of finding a middle ground. The newly elected socialist Prime Minister, Alexi Tsipras, has accused Berlin of racist policies and demanded reparations for WWII. His main campaign platform was to fight stringent regulation and control by EU creditors, lower Greece’s debt burdens and lift the country out of its financial woes with a severely leftist policy. In response, German finance minister Wolfgang Schåuble accused the Greeks of not holding up their end of its bailout agreement and rabble-rousing. Warm remarks for one another were few and far between.

In response to the ever-worsening crisis, Greek citizens have become increasingly weary. Dorothea Lambros, a government employee, took her money out of a Greek bank saying, “I don’t know what happens.” The fear of default is pervasive, but news of a movement by Greece to ease tension has been calming. In the last three days of last week, the Athens economy dropped 15 percent.

In response, Greek politicians have made moves to ease tensions and conclude the crisis. In the economic minister’s remarks on Monday, Greece has made concessions to its EU creditors. According to Stathakis, taxes would be levied on wealthier income tax brackets in an attempt to meet expectations of the IMF to achieve a government surplus in the future. In his words,

“We [will] try to remove the tax burden from pensions and wages towards business and the wealthy.”

At the EU summit on the matter today, Donald Tusk, European Council President, sounded pleased by the proposal dubbing them, “the first real proposals in many weeks.”

In response, not just to the low jabs taken by both sides in the media, Tusk continued to say,

“This evening I want all cards on the table. That doesn’t mean I want to negotiate technical details, but it means I want to end this political gambling.”

However we should not be too quick to dub the proposal an over-arching solution. There are many loose ends to cauterize and technicalities to iron out. If the economic reforms Stathakis proposed are not comprehensive enough to achieve a 1 percent budget surplus this year, 2 percent next year and 3 percent in 2017, then the three bodies presiding over Greece’s economic reconstruction, the European Council, the IMF and the European Central Bank (ECB) respectively, will not continue to support Greece.

So what does this mean? Well, this would preclude Greece from receiving an additional €7.2 billion in recovery funds. Secondly, the political rift between Greece and the EU will be irreparable. This would most likely lead to Greece’s departure from the EU and the adoption of a new currency: an outcome neither side could live with.

Were this to happen, Greece would be left on an economic island, subjecting the country to increased trade barriers in the EU, which would cripple an already disabled economy. While this may sound unpleasant, the outcome would be just as bad, if not worse, for the world as a whole. As recent history has taught us, the economy of one affects the economy of all. In today’s climate, every sovereignty is dependent on a healthy global network. So if Greece were to fall through on its responsibilities, the fallout would crush an unstable recovery effort.

We must hope that French President Francois Hollande is being pessimistic and not pragmatic when he warns, “not everything has been resolved.”