European Union leaders meeting this week for the umpteenth time in Brussels to resolve the Greek crisis are very likely to come up with another solution that will again see them congratulating themselves on their ability to resolve tough economic problems in a pragmatic way.
The sobering reality that the EU will have to face after the untying of this Grecian knot is that any interim solution will amount to little more than kicking the can’ further up to road.
The options that EU leaders face are Hobson’s choices. They will not quickly resolve the issues that have been plaguing the common currency from its creation.
The most dramatic option is Grexit – Greece leaving the eurozone and possibly the EU, or being forced to do so by its creditors that are mainly German and French banks, but also countries like Malta that contributed to the first Greek bailout fund. This option is possibly the one with the most dramatic political impact on Greece as well as on the EU.
The Greek Prime Minister, Alexis Tsipras, has played hard and has courted Russian President Vladimir Putin in the process, which made Germany and the rest of the EU think about the prospect of widespread geopolitical risk not just on its Eastern borders but also in the Mediterranean.
With Grexit, creditors would have to probably say goodbye to the prospects of ever getting repaid in full. Malta has an exposure of about €177 million and the last thing we need is for this to be turned from an asset to a liability in the form of provisions for a doubtful debt.
Should EU leaders accept Greece’s demand for a partial write off of debt, moral hazard will creep in. Countries like Ireland, Spain and Portugal that have had to go through the pain of restructuring their economy will demand similar treatment and ask for part of their own debt to be forgiven.
Perhaps, even more important, caving in to Greece’s demands will make the Syriza model a viable one for other countries. Fringe political parties like Podemos, Alternative for Germany, the True Finns and Movimento 5 Stelle will gain in strength as beleaguered European citizens in most EU countries fed up with austerity continue to lose faith in mainstreams parties of the right, the centre and the left.
Many doubt whether the EU itself can survive such seismic change in the political landscape.
The most likely option will be another fudged solution whereby Greece will accept some economic reform impositions from the European Council, only to come back to the negotiating table in a few months’ time to declare that it still cannot deliver what it promised.
In the light of his electoral promises, Mr Tsipras will certainly face a tough battle back home.
Greece’s debt is almost unserviceable at its present levels. Moreover, it will take many years for international investors to consider investing in Greece as they doubt the long-term viability of economic reform.
What the EU requires beyond a quick untying of the Grecian knot is a truly genuine political effort to reform the eurozone by underpinning the single currency with strong fiscal and economic union.
The only way that a monetary union can succeed is through fiscal and economic consolidation that, in turn, implies giving up some of the sovereign powers enjoyed by member states. No one is under any illusions that this is a tough ask.