The Greek tragedy

The Euro Zone appears to be lurching towards its Lehman moment with Greece dangerously close to a default situation. By seeking a big cut in debt and planning major public spending, the new government in Athens of Alexis Tsipras has thrown the gauntlet before the Euro Zone, or rather German Chancellor Angela Merkel — the embodiment of an austere Europe.

Tsipras has also refused any further dose of dole — to kick the habit, as its Finance Minister puts at — as the conditions are excessively harsh.

The Prime Minister blames Germany’s policies for choking Greece and making it impossible for the country to repay its debt that has soared to 175 per cent of GDP, despite tax hikes and spending cuts.

He is demanding debt forgiveness. Tsipras is right in part. Setting tough austerity conditions, on one hand, and adding to Greece’s debt, on the other, doesn’t quite add up.

More than anyone else, Germany must understand this untenable position; after all, in the 1950s, it was asking for just such debt forgiveness as it reconstructed after the War.

On the contrary, the Germans and the others, who bailed out Greece, want Athens to stick to the promises it made. Their fears are that if Greece manages to pull off its blackmail, others — Spain and/or Portugal — may be tempted to do it.

Then there is the fear of Greece exiting the Euro Zone. Though less onerous than previously thought, it could still lead to much pain as it will lead to bank collapses and loss of unemployment, and income. Much of Greece’s debt is held outside the country and a Grexit would mean some sharp haircut for the lenders. And if others, like Spain, line up with similar demands, a contagion may get very real.

Yet, what appears to be the inevitability of a Greek tragedy may well end as a farce with Merkel receding from her position as otherwise she may be condemning the Euro Zone to another financial turmoil.

As it is most countries in southern Europe have not had any growth since 2009 and face huge unemployment. And, now, the fears of deflation are becoming very real. In all likelihood, Greece will be accommodated.

Of course, the European Central Bank, which has been refusing to provide emergency liquidity to Greece’s banks or buy up its bonds unless Athens falls in line with what creditors want, must relent.

For all this, Tsipras must be made to continue with reforms. He must rethink plans to rehire some 12,000 public sector personnel, put through a major minimum wage hike, and nix privatisation. He can also take advantage of the situation to crackdown on corruption and break the entrenched business-politics nexus.