It would appear that the battle lines between the Greek government and its creditors have been drawn. The speech by Prime Minister Alexis Tsipras accusing the International Monetary Fund of “criminal responsibility” may have signalled the end of the line. The Greek Prime Minister does not want to cut pensions and increase VAT and Greece could default on the next tranche of payments due to the IMF. Everything now depends on the stance adopted by the European Central Bank and the EU (the other two members of the so-called ‘troika’).

The left wing of the party led by Tsipras, which is already radical enough, deemed it pointless to continue discussions with Greece’s creditors and proposed a nationalisation of all of Greece’s banks, the introduction of capital controls and the establishment of a sovereign central bank able to stand behind a new financial system. Such views show how difficult it could be for Tsipras to rally his party’s support for any deal that crosses Syriza’s electoral ‘red lines’ on pensions, labour rights, austerity and debt relief.

Talks with the creditors collapsed last weekend, leaving a final decision on a default to the eurozone’s finance ministers. Hence the headline of this week’s contribution that the time of reckoning is here. It has also been reported that the EU told the Greek government to prepare for a state of emergency. This gives a sense of the difficulty of the situation. Another report stated that the German Chancellor, Angela Merkel, has given up on trying to keep Greece in the eurozone.

The president of the European Central Bank stated that the euro area was better equipped than it had been in the past to deal with a new Greek crisis but warned of “uncharted waters” if the situation were to deteriorate badly. When asked about the risks of contagion from a new flare-up in Greece, Draghi said that the ECB has enough instruments at this point in time  which would certainly be used at a crisis time if needed.

The time of reckoning is not only related to whether Greece will default or not, but also whether the European socio-economic model will be threatened because of such a default

European leaders have been in a similar situation before and have managed to strike a deal to avoid default and Greek exit from the euro. But those agreements have only put off the moment of reckoning without resolving Greece’s fundamental economic and financial problems.

To break the cycle, there needs to be a realistic plan to revive the Greek economy and put the government’s shaky finances in order. Moreover, for such a plan to work, it must also take into account the parameters within which the Greek government is working and on the basis of which Tsipras was elected prime minister.

It is difficult to state what this plan would look like. However, it would need to include a delay in the payment of some of Greece’s debt, which today accounts for 177 per cent of the country’s gross domestic product. The government of some EU member states must appreciate the need for this more than others as some of the money they put up was to repay Greece’s private lenders, many of which were banks and investment firms in their own countries. This was not the case for Malta which was only slightly exposed to Greek debt. Yet we still took up our share of the bailout programme.

Under such a plan, Greece would need to agree to a revision of its pension rules. This means not so much a reduction in minimum or state pensions but it needs to end early-retirement options that are a drain on the public pension system. The Greek government will have to do a lot more to combat tax evasion and end cumbersome business and licensing regulations that create opportunities for corruption. It needs to be noted that on average pensions in Greece are at the same level as they are in Germany.

The need for such a compromise was best reflected in what Draghi said recently: “Growth with social fairness and fiscal sustainability had to be a part of any deal between the eurozone and Greece”. Failure to achieve such a compromise can be more dangerous to the eurozone than an actual Greek exit.

Therefore the time of reckoning is not only related to whether Greece will default or not, but also whether the European socio-economic model will be threatened because of such a default.

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