Catch-22: Give democracy a chance and keep Greece in the Euro

Ulrike Liebert, Professor in European Studies, looks at the tensions that are arising between the need for effective economic governance in the Eurozone and the need for democratic accountability, both of member states and the EU as a whole, particularly in the context of the outcome of the Greek referendum.

Eurozone leaders sometimes seem to forget that that they are governing an economic and monetary union that is part of the European Union of states and citizens, founded on common values such as ‘respect for human dignity, freedom, democracy, equality, the rule of law and respect for human rights, including the rights of persons belonging to minorities’ (Art. 2 TEU).

The Greek population of 11 million represents a minority within the nineteen Eurozone states of some 300 million citizens, a minority which is deeply divided over the burdens which Eurozone rules require them to bear for the sake of the euro’s stability. The referendum of 5 July was an unprecedented instance of a plebiscite on Eurozone bailout conditions, and Eurozone leaders had no choice but to acknowledge it as a legitimate means of democracy. Greek voters turned out in unexpectedly high numbers and forcefully spoke their will.

Mixed messages or wilful misinterpretation?

Regrettably, Eurozone leaders, notably from Germany, have misinterpreted this message from the Greek people. Social Democrat Vice-Chancellor Sigmar Gabriel first welcomed the announcement of the Greek referendum, then accused Tsipras and the majority of Greeks of simply rejecting the single currency rules, concluding that this made ‘Grexit’ imperative.

I believe the hardline stance on the negative referendum outcome – allowing Grexit to happen or even actively manufacturing it – is based on misleading ideas, with dangerous consequences, on three grounds. First, reading the ‘no’ vote as a statement in favour of Grexit is factually wrong. The Greek government made clear to its people and to its Eurozone partners that it does not pursue an anti-Eurozone course but instead wants to negotiate the terms of Greek membership, namely the dysfunctional austerity conditionality that over five years has been working against economic and labour market recovery.

Second, the potential outcome of this misreading of the Greek vote is dangerous. It would enforce the will of others (such as lender governments) on that of the Greeks (debtor government and citizens), which could lead to an even worse situation: the exit of Greece from the Eurozone, now being called ‘Graccident’. This power asymmetry in fundamental decision-making relating to the future of both Greek and European society empowers a group of political leaders in Brussels and national capitals. These leaders are neither accountable to the Greek people, nor can they make the case to their own constituencies that making Greek membership in the Euro work will be more costly than a Grexit with default on all loans. These democratic deficits have the potential to seriously damage the very project of a European Union of states and citizens which the European people can identify with, even in economically hard times.

Third, the economic, social and financial costs of a potential ‘Graccident’ for citizens in the Eurozone and beyond (the Balkans, Turkey, Southern Europe, Africa…) could be astronomical. This would further undermine the democratic life in, and legitimacy of, the European Union and would likely harm the shared democratic identity of European member states.

What is next for Eurogroup negotiations?

The outcome of the Greek referendum presents the Eurozone political class with a catch-22. A ‘yes’ vote would have provided space for another government to approve the current draft programme allowing Greece to stay in the Eurozone, admitted it plays by the rules and implements painful fiscal discipline and tough structural reforms. A ‘no’ vote instead is a show of democratic will from those most affected by the disciplinary burdens of the Eurozone, a blow that is seen to threaten the credibility of its rules. Over five months of negotiations, Eurozone creditors have made clear that Greece has only two alternatives between which to choose: either hard adjustment with assistance within the Eurozone, or exit, with state bankruptcy and eventual recovery outside the Eurozone. The rejection of the reform programme was meant to dismiss the conditionality on which the stability of the common currency rests and, therefore, implied the disqualification of the rebellious minority for future financial assistance.

As a consequence of the referendum and with a meltdown of Greek banks imminent, the Greeks must now seek a new deal, even though creditor governments, constrained by their own publics, tend to prevaricate which may provoke new confrontation. Creditors had promised to keep the doors open for negotiations, but must work once again with Tsipras (albeit with a different Finance Minister) who has used the last of his political capital and threatened future constructive cooperation by calling a referendum, which in their eyes was superfluous. Moreover, since the Greek leaders will likely feel empowered by the referendum results, the remaining Eurozone-18 will feel a heightened need for coherence and the protection of the fundamental principles on which the Eurozone is premised, and will reject any claims for further financial support from Greece. Even with the best will in the world, Eurozone leaders will struggle to find sufficient support among their own constituencies for providing financial solidarity to Greece without ensuring its fiscal solidity. Should there be no political settlement, the ECB might cut off support to Greek banks and Graccident – a disorderly exit of Greece – would become unavoidable.

EMU: what can we learn from Greece?

The Catch-22 is therefore how to enable Greece to keep the Euro despite not conforming to some of its rules (such as debt service or austerity conditionality), whilst at the same time ensuring that this does not threaten the integrity and stability of the common currency. While the fundamental rules of the evolving system of EMU governance should not be altered, they do need additional flexible provisions to strengthen the Eurozone’s capacity to learn from past failures, for more effectively coping with mutually reinforcing fiscal, political, social and political crises in the future.

The Greek experience, compared to those of other ‘programme’ countries, is a telling case in point that suggests the following flexibility rules. First, to buy time to avoid the bankruptcy of Greece, the ECB could provide more liquidity to Greek banks to take them beyond the 20 July deadline (substituting Greek collaterals for temporary ECB control).

Second, a rule could be introduced whereby, under exceptional conditions, a Eurozone member state could request a debt moratorium for a limited period of time, for instance if it presents proof of an unsustainably high level of sovereign debt that obstructs recovery and social cohesion. If granted, the country would be exempt from servicing its debt or interest payments, without being forced to submit to the string of bailout programmes that creditor countries would insist upon, but whilst still being prohibited from incurring new public debt.

Third, a temporary partial opt-out from specific Eurozone rules could be considered for members in a state of intractable crisis with prolonged economic, social or political problems, where compliance with the rules has proven part of the problem rather than part of the solution; the excessive austerity programmes in the context of economic recession in Greece are telling cases in point.

Fourth, a country in protracted crisis could be allowed to move forwards. This could be done by offering priority requests for those EU funds aimed at facilitating the necessary domestic structural reforms, reforms that the government has either designed in cooperation with the EU institutions (with technical assistance by the IMF) or, alternatively, with other supranational organisations, international think tanks or research institutions (World Bank, OECD, Council of Europe, ILO, IISD, VOX CEPR, or others) or with other states with proven expertise in the specific problem area. Under such conditions, EU funds could provide the necessary stimulus to create ‘special economic zones’ that would be attractive for (domestic or foreign) investors in an otherwise depressed economic environment.

Finally, to tackle humanitarian and social crises, more generous community funding could be earmarked. This would not be channelled exclusively through national welfare state administrations or the private sector, but rather by upgrading supranational and transnational mechanisms operating with or even by civil society, for example the European Youth Employment Programme and the European Voluntary Service.

I believe there are misleading ideas at play that oversimplify the answers to the complex challenges facing the Eurozone. Greek citizens should not be made to believe that their no in the referendum will end austerity in Greece any time soon. Also, we should not trust the ill-conceived claim that national referendums will pave the way to democratising the technocratic supranational EMU regime. But in exceptional cases referendums can, and should, be used to allow a minority to make its otherwise weak voice better heard by a European political class dominated by national majority concerns. Finally, the effective management of the referendum and the unexpectedly high turnout could convince even Greece’s most sceptical partners that if the Greek people stand behind its government, there is actually a good chance for Greece to take ownership of a meaningful, long-term programme for successfully modernising its state, the economy and society.

Professor Ulrike Liebert is Professor of European Studies at the Jean Monnet Centre for European Studies at the University of Bremen.

Note: The views expressed in this post are those of the author, and not of the UCL European Institute, nor of UCL.

Photo by Markus Spiske on Unsplash

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