Why a Grexit should (and would) be vetoed

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The noise around Greece is getting cacophonous, as each side poses and postures. The skirmishes have been rather frivolous so far, symptomatic of the two sides sussing each other out. The serious discussion is set to begin today at the European Council, but it will take weeks, if not months, to reach substantial conclusions about the future of Greece and, consequently, the Eurozone and the European Union itself.

It may be too early to pick winners, but Greece has fought a good fight. Syriza and its youthful leader Tsipras have kept their cool under unprecedented pressure. He, together with his charismatic Finance Minister Varoufakis, have come out as passionate pro-Europeans and have made many, often sensible and responsible, concessions to European partners by moving centre. Unfortunately, the same cannot be said of these partners, given that Jeroen Dijsselbloem, the president of the Eurogroup and Wolfgang Schäuble, the German Finance Minister, have been bullying, bitter and often irresponsible with their comments. Fortunately, both are just supporting actors in the Greek drama.

Greece’s fate will not turn on technicalities, but it will be the outcome of a ‘great game’ that has now begun. The European Council of leaders and the United States will provide the political anchor with the Commission, the IMF, the OECD and the ECB being the main economic actors. NATO will bring in the security angle and Russia, though absent, will undoubtedly loom large in negotiations.

The key actor, of course, will be the Greek Prime Minister Tsipras. Financial, economic, political and security considerations all give him a much stronger hand than many think. Let us look at each in turn.

Many European finance ministers have refused, point blank, Greece’s initial request to write down some of its loans. They rightly view any such write-down, which will inflict immediate transparent losses on their taxpayers, as being politically toxic. However, if they fail to give into Greece’s very reasonable requests for easier terms on existing loans and a bridging provision to meet funding needs and pull the plug on Greece, they may be committing financial suicide. The uncertain but possible future repayment of the more than € 180 bn that Greece owes its Eurozone partners will turn into a near-certain immediate loss of perhaps more than € 100 bn, assuming the 50%-60% haircut needed if Greece leaves the Eurozone. This will make a big dent in government finance statistics for already vulnerable countries, and cost ruling governments votes, as the losses will be seen to be the result of a gratuitous crisis that should have been averted.

On the economic front, the Eurozone may finally be, after years of despair, just turning a corner. Growth, however weak, is back in most economies and the triple combination of the low oil price, the ECB’s fairly large quantitative easing programme and the related steep fall in the euro could just, maybe ‘only just’, mean that the worst of the Eurocrisis is now behind us. It’s clear, however, that vulnerabilities abound in the Eurozone and that the fragile nascent recovery will likely be throttled by the shock of a Grexit. Pushing Greece out would be economically disastrous and undermine the ECB’s belated but powerful quantitative easing programme. Would the Eurozone really be ready to cut off its nose to spite its own face? Maybe moralising Germany would, but surely saner, less hidebound voices from France and Italy would prevail. The ECB, for understandable reasons, is also dead opposed to a Grexit, as are the European Commission, the IMF, the OECD and the G-20.

Politically, as I wrote here, the Eurozone is almost out of breathing space to enact sensible policies. Syriza, a rare European party that is pro-euro, not xenophobic and has rising popular support domestically, is being sensible and reasonable in its policy demands after years of great depression in Greece. After having imposed technocratic governments, forced reruns of elections and referendums, the EU faces the prospect of losing all democratic legitimacy, as seen in the rise of parties such as the far right National Front in France. To bully Syriza and crush Greece’s reasonable requests may be the last straw that breaks the back of the European Union as a democratic union of willing sovereigns. Which German chancellor or other EU leader wants to preside over the possible disintegration of the world’s most successful peace and prosperity project? Mark my words, if Greece is booted out, the far right will get a major boost in European elections, and we have been to hell and back before.

In some ways, perhaps the most important is the security dimension of a possible Grexit. At the time when the injured and desperate Russian bear is growling at the EU’s doorstep and has already bitten off a chunk of Ukraine, military top brass are tearing their hair out that the Eurozone would even bring up the prospect of a Grexit. This puts at grave risk everything that NATO and the EU have worked towards for decades.  Presumably, an exit would not happen on good terms and would inflict further pain on Greece. Russia would undoubtedly celebrate this and use every means possible to gain leverage in the strategically important area of Southern Europe. Even more importantly, the signal this sends on the EU’s lack of capacity and willingness to look after its own will tear the credibility of the EU’s near neighbourhood and expansion policy to shreds. To lose Ukraine would be careless, but to also lose Greece would be unthinkable. Surely, the US, NATO, France and the UK - the EU’s foremost military powers - would veto a Grexit on security grounds. Yes, a Russian bailout of Greece will never happen, but the threat posed by Russia and the collapse of the EU as a force in foreign policy would be very real.

On financial, economic, political and security grounds, it is greatly in the Eurozone’s interest to make peace with Syriza and to compromise on a deal that will finally give Greece a fair shot at becoming a responsible, functioning and respectable member of the Union. No matter how angry German and Finnish politicians might be at what Greece has done in the past, the EU and its political legitimacy may just be saved by an unlikely alliance of unelected bureaucrats, eurocrats, central bankers and securocrats vetoing a Grexit once and for all. Secretly, they are all rooting for Tsipras, Greece and a stable European Union. Prime Minister Tsipras is no Superman and faces unprecedented challenges, but he does have allies in high places whose interests, fortunately, overlap with his.

Sony Kapoor is Managing Director Re-Define and a Senior Visiting Fellow at the London School of Economics