By Ambrose Evans-Pritchard 19 February 2015
“There is no macro-economic argument for further fiscal tightening. The only reason for doing so is on punitive grounds,” says Greece's Yanis Varoufakis
Failure to agree a deal could set off a chain-reaction in Greece as capital flight accelerates, leading ineluctably to a sovereign default and ejection from the euro Photo: Alamy
Greece has vowed to reject any demands for further austerity at a last-ditch meeting with Eurozone creditors on Friday, even though the country risks running out of money by next week without a deal.
Yanis Varoufakis, the Greek finance minister, said there can be no agreement if the EMU creditor powers continue to insist that Greece sticks to the terms of its EU-IMF Troika bail-out and increase its primary budget surplus from 1.5pc to 4.5pc of GDP by next year.
“We have bent over backwards to reach an accord. We are perfectly prepared to refrain from any moves that would jeopardize financial stability or Greek competitiveness. But what we cannot accept is that the fiscal adjustment, agreed by the last government, be carried through just because the rules say so,” he told The Telegraph.
The defiant stand by the Leftist Syriza government raises the risk of an irreversible showdown when finance ministers from the Euro group converge on Brussels on Friday for yet another emergency meeting.
While there is mounting irritation in EU circles over Germany’s refusal to give ground, and signs of a Franco-German rift are emerging, the Greeks are on thin ice. Failure to agree a deal could set off a chain-reaction as capital flight accelerates, leading ineluctably to a sovereign default and ejection from the euro.
“We have already done more fiscal tightening than has ever been done by any country in peace-time, and Greece is still in depression with declining nominal GDP. There is no macro-economic argument that can be made for further tightening,” said Mr Varoufakis.
“The only reason for doing so is out of ideology or on punitive grounds. All we are seeking is a way to end the debt-deflation cycle and restore the credit circuits of the Greek economy,” he said.
Mr Varoufakis sent a fresh proposal on Thursday to Jeroen Dijsselbloem, the Euro group's chief, stating that Syriza is willing to “honour Greece's financial obligations to all its creditors” and desist from any “unilateral actions” in exchange for bridging finance and a six-month interim arrangement. The Greek offer included the crucial proviso that Syriza will limit austerity to “appropriate primary fiscal surpluses .. that take into account the present economic situation”.
EU officials said the text was prepared in conjunction with Mr Dijsselbloem on Wednesday night. He drafted eight bullet points that would be “palatable” to the Euro group. These were accepted by the Greeks.
The plan had the enthusiastic support of the Jean-Claude Juncker, the European Commission’s chief. French president François Hollande also backed the compromise, going so far as to telephone Greek premier Alexis Tsipras on Thursday morning to congratulate him on the breakthrough.
Diplomats thought there was a “done deal”. The German finance ministry then issued a statement rejecting the text out of hand, causing consternation. “The letter from Athens offers no substantial solution. It focuses on bridge financing without meeting the conditions of the programme,” it said. Berlin later described the Greek demarche as a “Trojan Horse”.
It is far from clear whether German finance minister Wolfgang Schäuble has majority backing for a position that could lead to the break-up of monetary union by the end of the month – with unknown risks of financial and political contagion - or whether he has overplayed his hand. There is a loose parallel with developments at the European Central Bank, where a noisy German-led bloc was outmanoeuvred by a Franco-Italian alliance on quantitative easing.
Greece has quietly kicked the issue of debt relief into touch, and agreed to work with the various components of the Troika so long as the term is not used. It has yielded so much ground that there was uproar within the Syriza party in Athens on Wednesday night. A mutiny was narrowly quelled.
“Syriza have made a lot of mistakes and there isn’t much sympathy for them in the Euro group,” said Simon Tilford, at the Centre for European Reform. “But at the same time frustration is increasing at the intransigence of the Germans. Not every country is relaxed at the prospect of Greece being ejected from the euro. That would be the start of the real political crisis in Europe, not the end of it.”
The EMU-wide politics are complex. Madrid is insisting on an extremely tough line with Greece because it fears that any concessions to Syriza would be further grist to the mill of Spain’s Leftist Podemos party, which is pulling far head in the polls. Slovakia and the Baltic states are broadly aligned with Germany.
Officials at the International Monetary Fund and the Commission admit privately that the Troika’s fiscal targets have been overtaken by events and no longer make any sense. The Euro group nevertheless reiterated its demand for strict compliance with the old demands last Monday.
Greece is now prostrate. Tax arrears have reached €76bn and are rising by €1.1bn a month. “Greece is totally bankrupt. The ECB’s constant talk against us is causing a self-fulfilling deposit flight in the banks. It is so bad that anything could happen,” said one Greek official.
Germany appears to be working from the assumption that Syriza has no legitimate case and should abandon its election pledges, despite having won a landslide election victory with a mandate for radical change. Critics say this fails to acknowledge that the tectonic plates are shifting across Europe as electorates lose patience with austerity policies that have led to a longer slump than the 1930s.
Jacob Lew, the US Treasury Secretary, called Mr Varoufakis this week to urge a compromise and avert a potential disaster for the Greek people, but he has also called on the creditor powers to be more flexible. Washington has warned that Europe faces a “lost decade” if it persists with contractionary policies, a view shared by Britain, China and Japan.
Syriza's leaders say Greece has gone as far as it possibly can to assuage creditors but has reached its limits. They await the verdict in Brussels with weary fatalism. “Whatever happens we are not going to accept humiliation or become a debt colony of the Euro group. We will uphold our sovereignty,” said one official.