By voting no in last Sunday's referendum, and by such an impressive margin, Greece won itself a moment's elation — and may come to regret the consequences for years. It was one more in an absurdly extended series of miscalculations.
A deal between Greece and its European creditors was already hard to reach. As yet another deadline approaches this weekend, the task is even harder. Greece's leaders and now its citizens have gambled throughout on the European Union's desire to hold together the euro system. But they have steadily whittled that desire away. Greece's approach to the negotiations has inclined many in the EU to think that a Greek exit is in everybody else's best interests. The referendum seemed to confirm it.
As the impasse has dragged on, the stupid provocations of Alexis Tsipras and his team have also been counterproductive in another way. Each week's delay has brought worsening financial and economic paralysis. On the one hand, as Athens has emphasized, this makes debt restructuring all the more necessary as part of any plausible recovery plan. On the other, it shrinks what the creditors have to gain from resolving the crisis.
How so? Jacob Funk Kirkegaard explains the logic. Initially, a restructuring that cut, say, 30 percent from the value of Greek debt might have sufficed to stabilize the country's finances. In that case, investors could have hoped to recover 70 percent of what they were owed. Now, because the economy has deteriorated so much in recent months, a much deeper cut will be required. As Kirkegaard puts it:
"No matter what happens next, SYRIZA has already turned most of the euro area’s exposure to Greece into sunk costs. Financially, the euro area has nothing much to salvage in Greece and therefore has even less reason to compromise. Doubling their recovery rate from Greek exposures from 10 to 20 percent is not something Francois Hollande, Matteo Renzi, or Angela Merkel are going to bend over backwards to achieve. Tsipras and SYRIZA don’t seem to have understood that by undermining the Greek economy they have not only increased the amount of new measures they have to undertake to reach even lower fiscal targets but also lowered the benefit to anyone from striking a bargain with them."
Kirkegaard is right to criticize that tactical error. Where I disagree with him is in apportioning blame. This needless delay, and the hardening, insidious logic of default, is even more the creditors' fault than it is Greece's.
I agree with Barry Eichengreen on this. I've rarely been accused of overpraising the quality of leadership in the European Union, but even I had no conception of the cluelessness its governments might be capable of.
The point is this: Kirkegaard's argument cuts both ways. The creditors will bear their full share of the cost of default. To repeat, if they'd shown a little flexibility early on, they could have had 70 percent of what they were owed. They're headed for collecting next to nothing — while undermining the foundations of Europe's monetary union in the bargain.
True, Tsipras has been dishonest with his voters and has misled them about the costs of his actions. The same could be said about German Chancellor Angela Merkel. For months, she's failed to explain why it's in the interests of German taxpayers to avoid a Greek default. Most recently, she hasn't just failed to explain the situation, she has overtly misled them about what's at stake. Germans don't cut their losses by letting Greece default. They cut their losses by collecting as much as they can get.
As I pointed out last time, the referendum result — provoking as it might be to the burgeoning ranks of Greece's detractors in the EU — doesn't alter the interest that both sides still have, even now, in coming to terms. It looks unlikely that they will. This doesn't change the fact that they should.
Tsipras has failed his country, no doubt. But if Greece defaults and is forced out of the euro system, Merkel will have failed not only Germany but the rest of Europe as well.
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