Sunday 25 January 2015

Catharsis or catastrophe: what next for Greece and the Eurozone?


Steve Peers

Yesterday the anti-austerity party Syriza won a large victory in Greek elections and seems certain to become the government, probably in coalition with a smaller party. What is the likely impact upon the EU’s economic and monetary union?

The starting point is Syriza’s election platform. As discussed in more detail in this Open Europe blog post, that party’s aim is not to leave the EU or even the single currency, but rather to renegotiate Greece’s debts and the related austerity obligations. In particular, it wants part of Greece’s debt to be forgiven, and the terms of the remaining debt to be renegotiated, along with an abolition of the austerity demands made upon Greece as condition of previous bail-outs.

But whatever the political and economic arguments for this programme, it potentially faces some legal hurdles. There are limits on forgiving debt or ending austerity, as set out in the EU Treaties and the case law of the CJEU, which I discussed in a previous blog post (which this post updates).

In particular, according to Article 136(3) TFEU, any financial assistance to a eurozone Member State must be subject to ‘strict conditionality’. This is consistent with the CJEU ruling in Pringle, which stated that the ‘no-bailout’ rule in the EU Treaties (Article 125 TFEU) allowed Member States to offer each other financial assistance on the condition that it took the form of loans, rather than a direct assumption of Greek government debt by other Member States. Moreover, the CJEU pointed out, the ESM Treaty (the treaty between eurozone Member States which governs bail-outs) required that in the event of non-payment, the loans would remain payable, and had to be charged an appropriate level of interest.

So it’s not possible for Member States to drop all conditionality as regards loans to Greece, to forgive debt as such or to loan money interest-free. But it is open in principle to reduce the stringency of the conditions somewhat, to reduce the interest rates payable and to lengthen the repayment period – although there is always the risk that some litigant will try to convince a national court or the CJEU that this is going too far. Moreover, the rules in the EU Treaties only bind EU institutions and Member States, not private parties, third States or international organisations (although it might be argued that Member States are constrained as members of the IMF not to violate the no-bailout rule indirectly). So any renegotiation or default as regards such creditors is not subject to EU law rules in principle, although of course other legal rules might be applicable.  And as the Open Europe analysis points out, the bulk of the debt is owed to the Eurozone.

The case law does not rule out a short period of non-repayment of principal or interest, as long as the loans remain payable and subject to interest. Nor does it specifically address the possible conversion of loans into bonds, as some in Syriza have suggested.

Overall, it’s hard to see how the relatively modest renegotiation which EU law would permit would do enough to reduce Greece’s mountain of debt significantly, or to satisfy the voters which supported a Syriza-led government.

The renegotiation of loans might not be the only possibility to help out Greece. For example, arguably the Treaties do not rule out a form of (supplementary) unemployment insurance system as between Eurozone Member States, or support for another Member State’s social spending, as long as it would not take the form of paying off another State’s debts as such.

There is the ultimate possibility of leaving the euro, either at the behest of Greece itself or the other eurozone Member States. As I pointed out in the previous post, it isn’t legal to leave the Eurozone (or to force a Member State out) without that State leaving the EU. On that point, while it’s open to any Member State to leave the EU, it’s not legal to force a Member State out. At the end of the day, though, the European Central Bank holds the trump cards, since it could force a Member State to leave monetary union in practice by stopping the supply of money to that State. The independence of the ECB prevents politicians from ordering the bank to take such a radical step, but it might act on its own initiative.

Quite apart from its very dubious legality and severe economic effects, such a move would be a huge political mistake. The result might not be an increase in support for those moderate parties that reluctantly supported austerity, but rather for the far-right neo-Nazi Golden Dawn party, which came third in the elections.

The better course for the EU is to take this opportunity to re-engage with the millions of EU citizens who are affected or angered by austerity, and re-orient the EU towards ending that austerity, instead of generating more of it. Although this is more easily said than done, it should never be forgotten that the initial rationale for the EU was not austerity, but economic growth which raised living standards for the population as a whole. So in voting for a party which promised the latter, Greeks have reaffirmed, not rejected, the Union’s traditional raison d’etre, reminding it that the Union cannot maintain its social or political legitimacy if it becomes no more than a mechanism for enforcing austerity.

Barnard & Peers: chapter 19


  1. Isn't ECB's quantitative easing a negotiating power in Greece's hands (if it turns out to be legal)? There will be an adverse impact on the prices EU periphery bonds if Greece decides to leave the EU and these bonds may end up on the ECB's balance sheet. On the other hand, ECB could threaten to cut ELA, bringing the Greek banking system into collapse. It threatened to do in the Cypriot banking crisis. A compromise seems the most likely outcome, although a renegotiation could trigger equivalent demands from other indebted Member states.

  2. You forget the massive debt owed to Greece by Nazi Germany, which has never been repaid. There are no legal problems in arranging such repayment: the problems are (a) in quantifying the large amount, after periods of high inflation and a long period of time elapsed; and (b) that the Germans have no intention of paying their wartime debts.

    As you may recall, after WW II, the Germans were not forced to pay reparations as had happened after WW I. This was partly because the view was that either Germany should be completely destroyed as a country, or brought back into civilised behaviour. Since the latter choice was made, the USA financed economic recovery across Europe (including Germany and excluding the UK). However, the Greek case is rather different, with specifics that constitute an exceptional case.

    The irony here is that Germany expects Greece to pay its debts (mostly to Germany) but that Germany should not pay its debts to Greece. And the rest of the EU is complicit in this appalling abuse of power.

    1. If Germany ever did make such a payment to Greece, I think there would be a strong argument that it would not breach the EU's no-bailout rule, as long as it was clearly designated as a reparation for wartime.

    2. Germany would never agree to such a payment. The political repercussions would be immense. We are heading towards a permanent core-periphery divide if things do not change.

    3. The Germans were not forced to pay reparations? This sounds extremely fishy given that there is even a Wikipedia article on German reparations after World War II.

      And from this Time article:,8599,2093990,00.html suggests that Greece laid claim to $10 billion, which apparently would have been HALF the amount that the freaking Soviets suggested Germany should pay (and the Soviets suffered waaaaay more than the Greeks did at the hands of Germany).

      But even that $20 billion figure needs to be put in the context of the time. The Allies apparently agreed at Yalta that the German reparations were to mainly take the form of industrial assets and in limited aspects from forced labour rather than money. And it well known that the Allies extracted reparations from Germany within their occupation zones. So the idea that the Germans were not forced to pay reparations is truly suspect at best.

      More can be found here which basically throws that whole theory out the window:

      And lest there be any doubt over this, as a result of the 1945 Paris conference on reparations an Inter-Allied Reparations Agency was created. This IARA was agreed to by the Greek government, which itself was represented in the IARA just like all the other Allied governments:

      At basically every step of the way, Greece agreed to the path outlined for reparations. Greece really should have taken a principled stand and demanded that the 1990 peace treaty exclude Greece from the waiver agreed in regards to reparations to be paid to Allied countries. At the very least Greece would have a much stronger leg to stand on since without Greece the 1990 peace treaty would not be complete and the other countries could well sign the peace treaty without Greece (much as how the other Allied countries signed a peace treaty with Japan except for the Soviet Union).

      It would seem at best now that the strongest case Greece can make is the 476 million RM that Nazi Germany forced Greece's national bank to lend Germany during WWII. Greece's best case would seem to be claim the money was normal credit rather than war reparations (otherwise it would be voided by the 1990 treaty signed and ratified by Greece) which would mean Greece would be entitled to somewhere between $14-95 billion depending on whether or not interest is added.

    4. As you might discern from others' comments (presumably of German origin), despite the clear legal and historical evidence there is a determination of Germany not to pay for its Nazi financial crimes. (We cannot even mention paying for crimes against humanity, since there is no monetary value high enough.)

      Indeed, the main case laid by Greece is that of forced credit during Nazi occupation. The amount owed is extremely difficult to calculate because it includes inflation-based increase (of the war period) as well as notional interest thereafter. $95 billion is actually a rather low estimate, according to most economic historians.

      The main point is that there is not a legal restriction of debt forgiveness, given the history. The existence of wikipedia articles is not something to be taken seriously, I regret to tell you.

    5. LOL. "presumably of German origin".

      My, my. What assumption.

      Sorry, but I'm Canadian. But I guess for you there is no difference eh? Once someone isn't supporting Greece in an attempt to renege on an agreement they signed because of sour grapes they must be of a particular origin or supporting a particular group eh?

      Guess what though? I support Greece doing the right thing and for the other to treat Greece right. The EU needs to listen to the Greek people and ease up on the pressure for austerity, just as Peers writes above. At the same time the Greeks need to drop the sour grapes attitude and work constructively with their partners in the EU. If they really feel this strongly they should:

      1. take Germany to court

      2. leave the EU

  3. I just found a detailed article, agreeing with my views about war reparations, authored by Albrecht Ritschl, professor of economic history at LSE. Well worth reading!

  4. So the franchise should not be narrowed to British citizens only: Irish and Commonwealth citizens have the vote in general elections, Online Lawyer Marketplace so should have the vote for the Brexit referendum too.

  5. National Bank Of Greece (NBG) has had a tough past for a few weeks to endure it. The top management had to go through a shakeup, though that generally happens after the election of a new government. However, its deposits have been sliding faster than ever before, as many customers race to withdraw their cash, due to the government’s aggressive tone while sending shivers to many depositors and savers.