Europe's liberal illusions shatter as Greek tragedy plays on

Greece is running out of money. The government in Athens is raiding the budgets of the health service and public utilities to pay salaries and pensions. Without fresh financial support it will struggle to make a debt payment due in July.

No, this is not a piece from the summer of 2015 reprinted by mistake. Greece, after a spell out of the limelight, is back. Another summer of threats, brinkmanship and all-night summits looms.

The problem is a relatively simple one. Greece is bridling at the unrealistic demands of the European commission and the International Monetary Fund to agree to fresh austerity measures when, as the IMF itself accepts, hospitals are running out of syringes and buses don’t run because of a lack of spare parts.

Athens has already pushed through a package of austerity measures worth €5.4bn (£4.23bn) as the price of receiving an €86bn bailout agreed at the culmination of last summer’s protracted crisis and expected the deal to be finalised last October.

Disbursements of the loan have been held up, however, because neither the commission or the IMF believe that Greece will make the promised savings. So they are demanding that Alexis Tsipras’s government legislate for additional “contingency measures” worth €3.6bn to be triggered in the event that Greece fails to meet its fiscal targets.

This is almost inevitable, given that the target is for the country to run a primary budget surplus of 3.5% of gross domestic product by 2018 and in every year thereafter. This means that once Greece’s debt payments are excluded, tax receipts have to exceed public spending by 3.5% of GDP. The exceptionally onerous terms are supposed to whittle away Greece’s debt mountain, currently just shy of 200% of GDP.

If this all sounds like Alice in Wonderland economics, then that’s because it is. Greece is being set budgetary targets that the IMF knows are unrealistic and is being set up to fail. It will then be punished further for being unable to do what was impossible in the first place.

Predictably enough, the government in Athens is not especially taken with this idea. It has described the idea as outlandish and unconstitutional, but is in a weak position because it desperately needs the bailout loan and threw away its only real bargaining chip last year by making it clear that it would stay in the single currency whatever the price.

So Tsipras is doing what he did last year. He is playing for time, hopeful that by hanging tough and threatening another summer of chaos he can force Europe’s leaders to offer him a better deal - less onerous deficit reduction measures coupled with a decent slug of debt relief. For the time being though, the matter is being handled by the eurozone’s finance ministers, who want their full pound of flesh.

The mood is especially unyielding in Germany, where Angela Merkel’s popularityhas suffered as a result of her open door policy toward refugees. Faced with growing hostility, she has concluded that this is not the time to show any signs of weakness. She has sought to mollify German voters by giving her finance minister, Wolfgang Schäuble, a free hand to ratchet up his criticism of the stimulus policies Mario Draghi is pursuing at the European Central Bank, and by insisting that there should be no debt relief for Greece until Tsipras has done everything demanded of him.

Merkel must pray that the lid can be kept on Greece until after 23 June, because it is hard to see how a repeat of last summer’s argy-bargy would help keep Britain inside the EU - rather more important to Germany in the long term than a few billion euros of debt relief.

The reason is that David Cameron can only win his referendum by securing the votes of non-Conservative supporters, for some of whom the handling of Greece exemplifies everything that is wrong with the EU - its lack of democracy, hyper-conservative economic agenda and insistence that the single currency is a great success when in fact it has proved to be a colossal failure.

Greece received the first of its three bailouts six years ago, when the terms were negotiated in the weekend following Britain’s general election. Gordon Brown was on his way out, but the then chancellor Alistair Darling went to Brussels to discuss the deal with fellow EU finance ministers.

Since then, there have changes of government in all the big EU countries bar Germany, and most of the smaller ones as well. Voters showed their unhappiness by getting rid of the centre-right in France and the centre-left in Spain. They waved goodbye to Silvio Berlusconi in Italy and Mark Rutte in the Netherlands.

It has been all change at local level, but no change in Brussels and Frankfurt, where the officials responsible for the eurozone’s bone-headed policies carry on regardless. Voters across Europe have got the message from the way Greece’s opposition to austerity was crushed - you can vote for whoever you like, but it won’t make any difference.

The revolt against the status quo explains why Spain can’t form a government, the two parties that have dominated Irish politics since independence could barely muster more than 50% of the vote in the recent election, the runoff forpresident in Austria is between the greens and the far right and Marine Le Pen has support in France.

To be sure, this is not a phenomenon exclusive to the eurozone. There is marked hostility to the US political establishment, and it is clear that many voters in the UK simply do not believe the government’s warnings about the economic risks of Brexit.

The situation in the eurozone is worse, however, in part because the democratic deficit is so marked, in part because economic performance has been woeful and in part because there has been a dogged insistence on continuing with policies that have been both ineffective and unpopular. 

As Dan Atkinson and I argue in our forthcoming book about the failure of the single currency,* Greece was the point where progressive illusions were shattered. Until last summer it was just about possible to believe in a cuddly European polity dedicated to higher living standards, full employment and more generous welfare states.

Then a gun was held to Greece’s head. Tsipras was faced with a choice. Ignore what the people want or see your banks go bust. This in a country which had seen the economy shrink by a quarter in five years. Difficult to spot what was awfully progressive about sucking spending power from an economy woefully short of demand. Then or now.

*Europe isn’t working, by Larry Elliott and Dan Atkinson, Yale University Press