Most scenarios facing Greece are bleak. The country could default, introduce capital controls, forcibly convert savers’ deposits into bank capital, quit the euro and so forth. But there is still a chance things might not end too badly. All those who care about Greece, starting with its prime minister Alexis Tsipras, need to work hard on the least bad path forward.
This will require Tsipras not only to eat his words, but also to call a new election. The timing is tough, given a series of payments Athens needs to make to both the International Monetary Fund and the European Central Bank in the next three months, but just doable.
The essential first step is for Greece to agree a short-term deal with its creditors: to unlock 7.2 billion euros of loans and avoid a bankruptcy that will probably otherwise occur next month. Given that the two sides are still far apart, this won’t be easy. On the other hand, Tsipras says he is hopeful of a deal – so maybe that indicates he is finally ready to make concessions.
The most important one Athens needs to make is on pensions. The Greek system is unsustainable, largely because of a large number of exemptions that allow people to take pensions long before the official retirement age. The creditors must not give ground on this point.
On the other hand, the euro zone and the IMF should be prepared to compromise on labour reform. While they are right to insist on Greece not rolling back changes that have improved competitiveness, there is no need to dismantle yet more protection for workers.
Assuming such a short-term deal can be done, there would still be three questions. Will Tsipras be able to get his radical left Syriza party to support the deal? How will Athens be financed while it works through the summer on a longer-term agreement with its creditors? And will Greece and its creditors be prepared to agree a multi-year deal that will require yet more reforms and probably over 50 billion euros in new loans?
Calling a second election will be the best way of answering these questions. It would be a way for Tsipras to kick out the hardliners in his party. By securing a mandate from the Greek people to negotiate a new long-term bailout programme, it would also give the creditors more confidence that Athens would follow through on its commitments. That would, in turn, make it easier to get money flowing both now and in the future.
Unless Tsipras goes back to the Greek people, it will be hard for the creditors to trust anything he promises. After the last four months of dispiriting talks, they will worry that he will just take the money and fail to implement the programme.
Euro zone governments, led by Germany, will struggle to persuade their parliaments to authorise another 50 billion euro plus bailout for Greece, feeling they will be pouring good money after bad. The IMF will also be reluctant to play a role; but, if it doesn’t, it certainly won’t be possible to get the German parliament on board.
A second election, in which Tsipras told the Greek people that they would have to make compromises to save the nation, would change all that. Given that they want to stay in the euro and that the opposition is in disarray, the prime minister would be well placed to win a majority.
The best timing for a second election would probably be in July – after a short-term deal is secured but before negotiation on the long-term programme begins in earnest.
Under this scenario, Tsipras would agree some unpopular measures now and push them through parliament. Some of his hardliners are likely to rebel, meaning that he might need the support of the opposition to carry the day. The creditors would release the 7.2 billion euros left in the current bailout programme. Because this isn’t quite enough to see Greece through the summer, the ECB would also let the country’s banks buy more treasury bills from the government.
Tsipras can then call the election. Because less than a year has passed since January’s election, under Greek law he would be allowed to pick which candidates should run from his own party. He could therefore kick out the rebels, presumably leaving them to form their own far-left party.
This is why a second election is a preferable to a referendum, which has been advocated by Germany’s finance minister, Wolfgang Schaeuble, as a way of securing a new mandate from the people. After such a plebiscite, Tsipras would be stuck with the same parliamentarians.
Following the second election, negotiations on the new bailout programme could be completed. With Tsipras backed by a more moderate group of parliamentarians, the creditors should be willing not only to lend more money in return for reforms, but also agree some relief on the country’s massive debts, probably by extending the current interest rate holiday and the period over which loans must be repaid.
Such a scenario may seem like a fairy-tale. But it is one of the few without a deeply unhappy ending.