On Greece, Plan B is “rapidly becoming Plan A,” Finnish Finance Minister Alexander Stubb said before Saturday’s Eurogroup emergency summit, which deepened the breach between Athens and its European creditors.
As one of their own slides into default and potentially the first exit from the single currency, EU governments are now thinking about how to protect the rest of the eurozone in case Greece does tumble out.
“There is no precedent — these are uncharted waters to end all uncharted waters,” said Nicholas Spiro, who runs a London-based boutique sovereign debt consultancy. “There is no such thing as an orderly, semi-orderly, quasi-orderly exit of Greece from the eurozone.”
If Europe’s five-year-plus Plan A to avert Grexit fails, what exactly is Plan B? The contours of one are becoming evident.
1. Remind markets how small Greek economy is
After the collapse of the last-minute summit on Saturday, the Eurogroup reconvened down a member for the first time. They committed to doing “whatever is needed to secure that financial stability and security in the eurozone is maintained at its high level,” Eurogroup President Jeroen Dijsselbloem told the press.
Translation: Greece, you’re on your own, and you’re tiny compared to the rest of us together. The situation in the country “will deteriorate very rapidly,” Dijsselbloem said. “There is a big problem of risk management for the government of Greece.”
For the rest, not so much. After all, as European officials keep reminding the world, Greece accounts for 1.3 percent of the eurozone’s annual economic output.
As Greece imposes the capital controls announced by Prime Minister Alexis Tsipras on Sunday night, the 18 other euro-area countries will focus on ring-fencing Greece: isolating the risks presented by the massive capital flight from the country’s banks and over its borders; and reassuring financial markets that the eurozone is strong enough, financially and politically, to bear the potential exit of a member.
The private sector is no longer greatly involved in Greek debt after a sound haircut to privately-held debt in 2012. That’s why finance ministers hope the threat that loomed large five years ago to Europe’s banking system of a Greek default has been rendered close to empty — a point that the Eurogroup made again on Saturday. “We are in a much stronger position than during the crisis,” said the statement from the 18 finance ministers, not including Greece’s Yanis Varoufakis.
So are the markets buying it? Stock markets dropped across Europe, but eurozone government bond yields largely remained where they were, at low levels.
2. Remind everyone that the Greeks left the table, not the creditors
Tsipras and his Syriza government say the rest of the eurozone is perpetrating a crime against democracy.
The Eurogroup’s refusal to allow yet another extension to Greece’s bailout program (the last was in February) was “an unprecedented challenge to European affairs, an action that seeks to bar the right of a sovereign people to exercise their democratic prerogative,” according to a statement released by Tsipras Sunday night. “The refusal … will certainly damage the credibility of the Eurogroup as a democratic union of partner members states,” added his finance minister, Yanis Varoufakis.
But the EU is spinning a different story: Greece is the one who broke off negotiations over a cash-for-reforms proposal from the creditors. Shortly before Tsipras went on national television late on Friday night, a group of Greek negotiators who were huddling with Dijsselbloem and EU officials at the Commission’s Charlemagne building got a phone call from Athens and left.
“It was not the institutions that walked away from the talks last night. It was the representatives of the Greek government that walked away from those talks,” Dijsselbloem said. “It was not us that said the talks were going in a negative way. It was the Greek government that said what is on the table was a ‘no’.”
And it was Varoufakis who left the Eurogroup meeting on Saturday, refusing to remain with the group while they prepared a statement, as several ministers later briefed the media.
Their message is: The Eurogroup has been and will continue to be committed to save the currency. But what can they do if the Greeks abandon them.
3. Revive push for further euro integration
It takes more to convince the world that the euro won’t implode than to contain the immediate spillover of the latest Greek crisis. Varoufakis hit a sore point Saturday by saying that the eurozone’s credibility is at stake.
In other words, are the countries committed to sticking together, even as they edge closer than ever to the exit one of its members?
Funny that one might ask: It was a week ago, which feels like another era, when EU came out with a report drawn up by the so-called “five presidents” group about how to strengthen the eurozone. The report includes a three-step plan towards “Completing Europe’s Monetary and Economic Union.”
The memo, which was prepared by Juncker, ECB president Mario Draghi, Dijsselbloem, Council chief Donald Tusk and European Parliament President Martin Schulz, includes calls for a true banking union, a eurozone finance minister and more strictly harmonized controls over both the budgets and economic (hence, social) policies of the countries that use the single currency.
The paper wasn’t discussed as planned at last week’s two-day summit of EU heads of state and governments, which was consumed by Greece, terror attacks and migration. And at any other time those ideas are a bit too controversial to get any traction with the 19, perhaps soon to be 18, countries in the eurozone.
But as a former White House majordomo once said, “You never want a serious crisis to go to waste. And what I mean by that it’s an opportunity to do things you think you could not do before.”
It’s hard to get more serious a crisis in Europe than now.
While some of the big ticket monetary union reforms would require changes to the EU treaties, some steps might be achieved in the shorter term. The authors are pushing for a swifter way of providing additional funding to the common resolution fund for banks that becomes operational this January. Another proposal is for a single pan-eurozone scheme to guarantee bank deposits up to a certain amount. At present, countries insure deposits in case a bank goes bankrupt — a guarantee worth barely worth the paper it’s on in case the government is about to default itself.
Moving ahead on any of these may send a signal to the markets that the eurozone’s here to stay.
Echoing Rahm Emanuel, Germany’s Schäuble said on Saturday: “We’re ready to do everything necessary. Often after times of crisis, you come out ahead.”
4. Avoid any Plan B’s
The European Commission on Sunday made public the latest proposal agreed by the creditor group, in the hopes of “building a bridge” to Athens, as one EU official put it.
The document was under discussion on Friday evening, when the Greek delegation abandoned negotiations. EU officials came to believe that Tsipras was not aware of the creditor’s latest hour offer when he called the referendum in the early hours of Saturday morning, POLITICO has learned.
Until Tuesday, when the deadline on Greece’s second bailout package expires, there is a chance for a convergence between Greece and its creditors that could keep the country in the common currency and the European Union. For now the only legally conceivable way for Greece to leave the former is to leave the latter as well.
Tsipras swiped those hopes off the table in a speech late Sunday, when he told this people he’d preserve the “dignity of Greeks against blackmail and injustice.” The war of words was not about to end.
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But in the meantime, the 18 euro area members — everyone minus Greece — will have to continue to prove that they have done their best to keep Greece in the euro. “I’ve always said and will say the door is open,” Dijsselbloem said Saturday.