While we all watch with shock as Greece goes into an economic death spiral, much bigger waters are stirring with long term consequences for all of us. The tragedy of the current crisis is this: almost everyone comes out a loser. In spite of recent and their troubles are only beginning. Banking restrictions, market shortages and delays in payments, salaries and pensions will soon become a fact of life.
The creditors' road ahead is also bleak. They can hold their noses and write more checks to Greece, adding fuel to populist anti-austerity movements in other financially stressed countries, or let Greek banks collapse and force Greece out of the Euro. Either way, they lose. The former risks throwing good money after bad and the latter opens the door to future challenges to other, much larger -- but also weak -- Eurozone economies.
The world needs a strong European Union. The current challenges to the Eurozone threaten that. The impending Greek exit shines a spotlight on the fundamental flaw in the foundation of the Eurozone project. A common currency without the stabilizing force of a political, fiscal and banking union makes the Eurozone vulnerable to shocks and incapable of mounting rapid, unified responses in the face of crises. Markets will take note, and there will be a price to pay when the next country has a fiscal crisis, which is inevitable. Future global economic growth is at risk and we will all pay an economic price for the Greek morass. In addition to the economic woes, there is also a political and security price to the Greek crisis. Putin reached out to the Greek prime minister almost immediately after the referendum to express his support. The Kremlin is certainly smiling as they see the potential for a Trojan horse in NATO and the EU. The EU's plans to weaken their dependence on Russian energy are also at risk, as Greece was an alternate transit route from the Caucuses and Central Asia. And Russia has been eyeing Greek bases in the Mediterranean greedily as they look to project greater influence in the region. So what should happen next?
Eurozone creditors should recognize that Greece's debt is unsustainable. They should make a sizeable debt write-off as opposed to the "extend and pretend" approach of lengthening maturities and grace periods and lending Greece just enough to recycle the debt. The write-off could come in semi-annual tranches conditioned on a responsible fiscal program. But it needs to be big -- on the order of cutting half of the roughly $180 billion owed to the Eurozone countries -- to have the desired impact. The write-off will either happen in a negotiated way that encourages additional reforms, or it will happen as a result of a chaotic exit from the Eurozone.
The Greeks for their part need to recognize and acknowledge that they are on the doorstep of leaving the Eurozone, contrary to Prime Minister Tsipras' recent statement that this is not even on the table. They need to stop blaming others for the mess they are in, and implement a responsible program that restores faith and confidence in the government and allows them the fastest path back to accessing the European Central Bank and then international credit markets. They need to appeal to Greek pride and encourage their citizens to imagine how they would feel if their cousin Cyprus, who suffered similar problems, remained in the Eurozone and they were forced out.
But what is really likely to happen?
Sadly, I don't think that's the scenario that will play out. Politically, creditors will be unable to support a sizeable write-off in the face of their own domestic politics and the wild posturing of the inexperienced and radical Greek government. They will make a half-hearted attempt to negotiate an agreement, but disbursements will be so conditioned and limited to paying back themselves that failure will be guaranteed Sooner or later, they will encourage the Greeks to introduce a temporary parallel payments/currency system to mitigate the economic and humanitarian catastrophe developing in the country as the government and banks run out of cash. A return to the Euro will remain on the table as a desired outcome once the government has stabilized the situation and back on track with a reform program.
Greeks will see this as another pressure tactic and betrayal. The government will hang on longer than it would have otherwise because of the boost to nationalistic anger, but will eventually fall. A period of political instability will follow and the economic situation will continue to deteriorate. Over time, the door back to the Euro will close. Greece in its anger and hurt will look to Russia, China and Iran for solace and, while remaining in the EU and NATO, will become an unreliable partner until their economic situation significantly improves. And the Eurozone -- the centerpiece of the European project of integration -- will have shown its fault line, and the speculation on the next weak link will begin.