A number of Eurogroup countries are quietly urging Greece to re-consider a temporary exit from the eurozone, arguing that the requirements it would face under a third bailout are too much for the country to bear, eurozone officials say.
Even though the Eurogroup agreed on Thursday to begin new bailout talks with Greece, some members — including Germany and a group of smaller northern and eastern European countries — still believe an exit is the better option, albeit one that Athens would have to ask for.
“Greece can recover much faster outside of the eurozone than inside,” an official from a smaller eurozone country said.
Berlin, which has had a fraught relationship with the Tsipras government, has stepped back from trying to give Athens private advice, relying instead on smaller countries to make the case.
But the real strategy is to let events take their course. Athens is counting on significant debt relief, a concession other eurozone countries aren’t willing to make, despite pressure from the International Monetary Fund. Once the realities of a third bailout, which would entail deep spending cuts and tough reforms under strict supervision, sink in in the coming weeks, a sweetened Grexit offer could become a more attractive option for Athens.
The Greek parliament gave Prime Minister Alexis Tsipras a clear mandate Thursday to start negotiating the tough austerity measures that are the condition of the €86 billion bailout. Lawmakers in some of Greece’s most skeptical creditor countries have followed suit: the Finns and Dutch gave the green light Thursday and Germany’s Bundestag should do the same Friday.
Following the backlash to the so-called “timeout” plan in recent days, these countries don’t want to appear to be trying to force Greece out. Therefore, it’s important to them that Greece simply have the option.
But their preferred plan is still for Greece to leave the euro with the promise of significant financial aid from the eurozone and continued assistance from the European Central Bank to cushion of the effects of its exit. It could then undertake a hard restructuring of its debt, a step that’s not possible as long as it’s a member of the euro. Eventually, it would be allowed to rejoin.
The idea for a Greek “timeout,” first proposed by German Finance Minister Wolfgang Schäuble ahead of last weekend’s emergency summit, provoked an angry response from France and several other eurozone countries. They worry that a “Grexit,” even a temporary one, would set a dangerous precedent that would destabilize the already fragile eurozone. The question is whether they can halt the momentum building behind the German-led bloc.
Included in the draft agreement, the timeout clause was then taken out as a concession to Tsipras, who has so far refused to consider it, insisting that Greece can fulfill the obligations of a new rescue.
Schäuble, speaking on German radio Thursday, has continued to argue openly that a temporary Grexit “may be the better path for Greece.” At the same time, he pledged to support Chancellor Angela Merkel and vote for the bailout in the Bundestag Friday.
As pressure builds on Greece to follow through with its reform pledges in the coming weeks amid intense public resistance, eurozone officials say, Tsipras may reach the same conclusion as Schäuble: that leaving the currency union is in Athens’ best interests.
The advantage for Greece would be that it could remain in the European Union with a devalued currency that would make its economy more competitive, proponents of the option argue. Athens could also restructure its economy at a more gradual pace than is now being demanded by creditors.
Yet a Grexit would also wipe out the value of Greeks’ assets, and, many fear, further destabilize the country both economically and politically. And even after a “haircut,” Greece would have difficulty financing a debt burden denominated in euros with a new, considerably weaker, currency.
Jeroen Dijsselbloem, president of the Eurogroup of finance ministers from the single currency area, acknowledged with an edge of frustration Thursday that the debate about Greece being suspended from membership refused to disappear.
“I would be very happy if we could stop talking about Grexit and think instead about putting Greece back on track,” he said.
The issue will come to a head in the coming days. Though Europe agreed on the broad contours of bailout with Athens on Monday, the International Monetary Fund has yet to sign off on it. The IMF’s involvement is a pre-condition for the rescue to go forward. Yet the Washington-based fund is insisting on immediate debt relief to put Greece’s finances on a sustainable footing.
As a preferred creditor, the IMF would not be affected by a restructuring. Instead, the eurozone countries that already have loaned Greece about €200 billion, and possibly the ECB, would be hit.
Berlin insists that the ECB cannot accept any debt restructuring without violating its charter, which prohibits monetary financing, the use of its printing press to fund governments. Germany has also been unwilling to consider a haircut on Greece’s other debt.
“No one knows at the moment how this is going to work without a debt restructuring, yet everyone knows that a restructuring isn’t compatible with membership in the currency union,” Schäuble said. “That is the situation.”
Berlin and other eurzone capitals are only willing to offer a softer version of debt relief – by extending the maturities on loans – and only after Greece has proved it has complied with the demand laid out in its program.
But with Greece’s debt load continuing to rise amid a declining economy, many economists say that strategy wouldn’t be enough to put the country’s finances on a sustainable path.