The media assumes that Greece will now leave the Euro, if not the EU, just as last week they assumed a deal was done to avoid it. The mechanism is simple. The Eurogroup has decided not to extend further support to Greece beyond Tuesday. The same day Greece will fail to repay the 1.6 billion Euros it owes to the IMF. This will leave Greece in default or arrears, depending on how tough the IMF decides to be. Either way Greek government debt will no longer qualify as collateral under ECB rules. The ECB will consequently stop emergency lending to Greek banks, whose only collateral is Greek government debt. By the time of next Sunday’s referendum on the Eurogroup proposals, which are no longer on the table, Greece will likely already have run out money. In that case, the Greek government will have to impose capital controls and a bank holiday, and probably begin issuing its own currency. The referendum will have been overtaken by events. But it does not have to be like this, as reported French offers of mediation suggest. The tragic events in Tunisia tell us why it must not be like this.
As a rugby coach, I have always tried to teach my players to “lift the head”. This means to look more broadly at the play than just what is in front of them. It is an ability that in fact few have, and usually those whose skill sets are so strong that they have that little bit of extra time to look up and see the possibilities, and threats, across the whole pitch. One of the greatest at this was recently retired Irish centre Brian O’Driscoll, who could attack the defense ball in hand while directing the rest of the attack with his other hand (he also got a name check for his last game from Barack Obama). Another is the All Black first five eight (stand off for non-Kiwis) Dan Carter, who has an unrivaled ability to look up as he receives the ball to assess the options across the field, thinking several phases ahead. These are skills that the Eurogroup, and European political leaders in general, lack. Self-obsessed they seem able to focus only on the problem immediately at hand rather than the broader picture. As Greece heads towards exit from the Euro, the Eurogroup meets to put in place measures to prevent financial contagion to the rest of the Eurozone, but ignores the broader regional geopolitical consequences. In its obsession with the near and short term, it runs incalculable longer term risks.
I have already written on the geopolitical consequences of Grexit (http://www.shaunriordan.com/?p=177). Yesterday’s brutal attack on tourists in Sousse adds a new element to the mix. Foreign tourism contributes 15% to Tunisia’s GDP. Some commentators suggest that Tunisia’s foreign tourist season is now effectively over. This puts at risk thousands of jobs and the stability of the Tunisian economy. Tunisia has been one of the few (only?) successes of the Arab Spring. Now it could become another source of North African (for which read Mediterranean) instability, together with Egypt and Libya. Such factors should be foremost in the minds of Eurogroup ministers when they make a stand that risks destabilizing Greece. Europe already has a Mediterranean agenda it seems incapable of tackling, focused on illegal immigration and Libya. Islamic State may be adding Tunisia to the list, but it is the Eurogroup itself which is adding Greece. I have previously focused on the risks of crisis in Greece destabilizing the Balkans and even Turkey. Ann Applebaum wrote in the FT yesterday of how European diplomatic ineptitude is creating opportunities throughout Eastern Europe of which Russia is only too happy to take advantage ( http://www.ft.com/cms/s/0/32c10406-1b2d-11e5-8201-cbdb03d71480.html?siteedition=intl#axzz3e30yoMF3). What impact will destabilization all the way along Europe’s southern and eastern frontier have on the appetite of American investors for countries like Spain (where US investment has been a major driver of recovery)? This could be the real financial contagion of Grexit, for which even Super Mario’s printing presses may be insufficient.
I wrote last week of how the Eurogroup preferred a short term fix, kicking the Greek issue off into the long grass, to a genuine attempt to solve the problem (http://www.shaunriordan.com/?p=186) and how this could lead to Grexit anyway. The temptation to compare it to Munich and Churchill’s jibe about England choosing shame and getting war anyway was hard to resist. But it now looks as if the Eurogroup’s insistence on deferring the problem, rather than tackling the underlying issue of Greece’s insolvency, will indeed lead to Greece leaving the Euro. The reasons for the Eurogroup’s position were partly domestic politics and partly group think short-sightedness. Allison and Zelikov’s wonderful analysis of the Cuban missile crisis (Essence of a Decision) argued that the “rational agent model” was inadequate to explain policy making, and that political or bureaucratic models, where agents’ arguments and decisions are constrained by their position in political and bureaucratic structures, give a better account. Slightly more light-hearted, Rorden Wilkinson, now professor of IR at Sussex, once wrote an informal paper in which he compared WTO negotiations to a family Christmas in which everyone, on arrival, adopted and played out the role expected of them. This seems to give a good account of the Grexit negotiations, in which everyone has adopted and played out the role expected of them (fiscally austere Germans, even more austere Finns, headmistress IMF etc). No-one has been capable of escaping their designated role to see the broader geopolitical consequences. If one might not expect that of the Eurogroup of Finance Ministers, it should have been the role of the EU Summit. Instead, Merkel, who of all leaders should have been conscious of the wider picture, pushed it back down to the Finance Ministers. It seems Merkel is no Bismark.
Instead of obsessing about fiscal rectitude and moral hazard (neither of which seemed to matter when bailing out the German banks for their unwise loans to Greece in the first place), the EU should have been looking to consolidate Greece within the Eurozone as part of a broader strategy for promoting stability in the Balkans and Mediterranean. The financial cost of bailing out Greece would have been far less than the longer term costs of radically destabilizing the EU’s, and NATO’s, southern and eastern flanks. The countries with most to lose geopolitically, like Spain and Italy, seem eager to sacrifice their security on the altar of electoral considerations. There is still time to rescue the situation. France could, by stressing the broader agenda, play the mediation role it has suggested.