Prof Enrico Colombatto
Report by Professor Enrico Colombatto

The Greek financial crisis has been a missed opportunity for eurosceptic parties to put forward new ideas for the European Union. They have achieved nothing since sweep- ing gains in the 2014 elections. But the Greek crisis could still be used by the EU to formulate a new way of dealing with countries in financial trouble.


Eurosceptic parties, elected in May 2014 to the European Parliament, promised to work towards changing economic policymaking throughout the European Union. Their record over the last year has been disappointing. Greece’s financial troubles offered them plenty of chances to articulate their views and offer solutions, but these opportunities have been missed. The eurosceptics are devoting their energies to other themes like immigration policy and government spending targets but they should concentrate on the last chapters of the Greek default. Because of Greece’s size, the outcome may not be of great significance for the rest of Europe, but it could be a blueprint which other larger countries might be asked to follow in future.

EUROSCEPTIC success in the May 2014 European parliamentary elections sent a number of vociferous MEPs to Brussels devoted to changing the way the European Union works and its mission – possibly even bringing the eurozone to an end. But a lack of agreement within the ranks of the eurosceptic factions has meant that very little has happened in the last year. For example, although Italy’s Five-Star Movement and the UK Independence Party (UKIP) belong to the same European parliamentary group, they voted the same way only 27 per cent of the time, according to Votewatch which publishes annual and special reports on the votes and activities of the European Parliament and the EU Council. Another reason is that these parties prefer to concentrate their energies at home.

Economic vision

Their strength, in most cases, rests on the widespread disenchantment with the grandiose announcements and predictions expressed by the EU and Euro authorities, rather than on a shared set of propositions for radical reform in Brussels, Strasbourg and Frankfurt.

It is politically easier and more rewarding to attack the EU institutions from Paris, Rome or London than trying to bring about change from within the EU. Yet, it appears the eurosceptics are even falling down on the job as external observers. Greece would have been the ideal opportunity for eurosceptic leaders to detail their economic vision about the future and acquire credibility at a time when neither the Greek leaders nor the EU/Euro authorities seem to have a clear strategy.

Regrettably, most anti-euro and anti-EU parties have been surprisingly silent. Their luck is that their traditional political competitors are also rather confused, so the lack of initiative – wherever it comes from – fails to make much impact on public opinion. But the excuse is hardly acceptable – especially when considering what is happening in Greece.

Electoral promise

Everybody acknowledges that the Greek saga is almost over. The Greek authorities, the International Monetary Fund, the European Central Bank and the EU have done their best to twist the rules to ensure that the Greek treasury could survive for two months after it ran out of funds at the end March 2015. Today, the time for imaginative accounting and financing is nearly over. Greece is bankrupt regardless of what the Greek government and its creditors do, as we have written in previous reports. Greece will be unable to pay back its debt even if it reneges on its electoral promise to jump-start growth through renewed public spending. The only questions on the table now concern the technicalities of the default and the so-called Grexit or Greek exit.

With regard to the default, the main actors are focussing on whether to spread the losses over a number of years or to concentrate them in one single blow.

Foreign debt

The first option would materialise in some kind of debt- rescheduling programme, possibly with zero debt- servicing where the payment of interest would be frozen or cancelled.

The second option would consist of a substantial haircut imposed on all creditors. The impression is that the financial community is not particularly worried about this choice: Greece is relatively small, and a large part of its foreign debt is actually held by international organisations rather than private investors. The relationship between Greece and the euro is much more important, especially for the Greeks.

From the point of view of Greece’s Prime Minister Alexis Tsipras, quitting the euro – the Grexit – is tempting. This would allow his government to print all the dracmas required to finance current spending – including pensions and public sector salaries – and therefore defuse major tensions in the short run.

Amateurish bluffing

The downside, however, is that by leaving the euro, the Greek government would be likely to open the door to unrestricted demands for even larger amounts of public spending. The economy would soon be in a state of chaos, and Mr Tsipras’ political future would be doomed. Given the circumstances, the Greek prime minister’s proposal to have a referendum on the euro comes too late, and is a sign of weakness rather than of democracy. Eurosceptics initially liked the fearless way Prime Minister Tsipras and finance minister Yanis Varoufakis approached the haughty EU top brass. However, those admirers quickly backed off and joined their orthodox colleagues when it appeared the Greeks had no real strategy, and that their defiant attitude smacked of amateurish bluffing, rather than professional gambling.

Many continental eurosceptic commentators realised the Greek episode could be a testing ground for more significant events, like a major EU blueprint for debt restructuring in countries where public finance is no longer sustainable and speaking out would be dangerous.

For example, once the haircut applied to the Greek debt is announced and enforced, a renewed version of the much debated and much ignored Maastricht treaty might contemplate automatic haircuts. These could be enforced on all government bonds issued by EU countries where public debt is greater than 150 per cent of GDP, regardless of whether the debtor belongs to the euro club. This is not a scenario which today’s national politicians would like to advocate in public.

The anti-euro parties’ May 2014 electoral victory could have been an opportunity to think again about ECB President Mario Draghi’s monetary policy and, more generally, about economic policymaking within the European Union.

Regrettably, neither the anti-euro nor the pro-euro parties seized that opportunity.

New uncertainties

Greek finance minister Yanis Varoufakis’ defiance smacks of amateurish bluffing (photo: dpa)

Instead, the EU response to rising concerns about the economic future of the European Union has not been a serious commitment to deep reform with a view to enhancing growth, but rather a two-step strategy, where the authorities have strived to diffuse tensions in the realms of banking and public finance, and have also introduced threats of arbitrary bail-in practices. Quantitative easing exemplifies the first set of actions, while the repeated, but vaguely-worded, warnings that depositors could be obliged to rescue commercial banks, exemplifies the new uncertainties the public is facing.

In the end, the Greek episode has revealed that most eurosceptic political leaders have little to say. They find it easier to gather consensus by advocating anti-immigration barriers and better public spending rather than framing new visions for the future.

Neither the EU authorities nor national governments have been able to elaborate consistent and credible plans for structural reform and budgetary discipline to redress wobbly situations in a number of troubled economies. This is why we believe the future will feature a lot of improvising, as the various players explore how markets and public opinion react to the range of ways of presenting gangrenous situations which would require drastic decisions. Nobody currently has the political courage to take these decisions.

Instead, everybody is more than willing to sweep the Greek default under the carpet by agreeing to reschedule the Athens debt. Creditors, after all, have nothing to lose. But the big question is whether those very creditors are willing to provide Greece with the funds it needs to stay in the euro in exchange for vague, face-saving promises of reforms, or whether no extra money will be disbursed and Grexit will take its course.

Bouyant responses

In the meantime, the rest of Europe is watching. The most perceptive politicians in France, Italy, Spain and Portugal must be jittery. If Grexit is avoided, and Athens obtains further fresh cash, we can expect immediate buoyant responses from financial markets, as investors brush aside their worries about the public-finance situation in the eurozone. If, on the other hand, Greece is left high and dry and forced to quit the euro as a result, other countries will follow before long. The eurosceptics had better do their homework now if they want to take advantage of the disarray and turmoil which will follow.

This report has been written by Prof. Enrico Colombatto and made available to our members through the courtesy of ©  Geopolitical Information Service AG, Vaduz:

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