Kurt Hübner is Jean Monnet Chair for European Integration and Global Political Economy in at the University of British Columbia's Institute for European Studies.
Berlin and Brussels have toughened up their position: No further negotiations with the Greek government before the outcome of Sunday's referendum is known.
Chances are that the Yes camp will succeed. If so, the current Greek government would lose all its credibility, and the international institutions would have no reason to offer it further compromises. If the No side prevails, the situation would be slightly different, at least in terms of shifts in negotiation power, as the Syriza-led government would then have a good hand for its case to at least slightly soften austerity, and more so to move to a debt-restructuring plan.
But all the political theatre and posturing of the past few days can't make Greece's economic realities disappear. And these realities are dire.
Greece won't be able to make its debt service payments to the European Central Bank in July or August. Unlike its defaults to the International Monetary Fund, this default will have immediate negative consequences. The ECB will have to make the difficult decision to stop accepting the collateral that allows Greece's central bank to continue its emergency liquidity assistance (ELA), for the simple reason that a default on ECB payments will undermine, even destroy the quality of collateral of Greek banks.
Until now, ELA has been the channel that kept Greek banks liquid, kind of. If the ECB shuts this channel down, the problems will get messier by the day. At the moment, the combination of capital controls and selective bank holidays prevent an immediate breakdown of the Greek financial industry. A withdrawal of ELA will require Greek banks to write off their claims against the Greek state – claims amounting to about €22-billion – which would bring down the equity capital of Greek banks to about €30-billion ($41-billion Canadian).
That's not enough to keep them working properly: Euros would become a scarce asset, and banks might have problems filling ATMs. A recapitalization of the banking industry would be necessary, and the question would be who provides the funds. If the euro zone was a complete monetary union, this would be the ECB's task, as a lender of last resort. Given its legal restrictions and the political resistance of key members, though, it can't play this role. The result would be that the weakest Greek banks go bankrupt, and thus potentially start a downward spiral of the financial system that would bring the country even closer to the brink.
Whether you call it austerity or find a nicer word, economic and social hardship are here to stay.
A Greek government dealing with the consequences of a broad default would have no other option than to further tighten its belt in order to re-establish relations with its creditors.
With a Yes vote, the situation wouldn't be so different. The creditors would probably deal with a new Greek government more kindly. They might even offer a few goodies, but there can be no doubt that a third program for Greece would come with harsh conditionalities – austerity. And yet, this would differ in two respects.
First, it wouldn't be under the auspices of the quickly improvised rescue mechanism but under the conditions of the European Stability Mechanism. This would allow for a bit more leeway on the side of creditors. Second, some of the creditor leaders may not like it, but any such program only makes sense in combination with a debt-restructuring plan that actually reduces public debt obligation. The IMF has proposed such a step for a while, indirectly accepting that its previous debt sustainability analyses were plain wrong.
This economic insight, though, currently has no political counterpart. German Chancellor Angela Merkel, in particular, will have serious difficulties explaining to her party and her voters that Germany has to accept losses. The German public is wrongly under the impression that Germany is already paying for the party of the past – making the case that it needs to shoulder €10-billion ($13-billion) in order to support Greece will add fuel to a public fire that already destroyed trust between the two countries. And yet, without significant forgiveness, Greece will have no options for returning to a sustainable growth path.
But creditors will be willing to cross this Rubicon only if the next Greek government makes credible promises to implement reforms that eventually generate the primary budget surplus target of up to 3.5 per cent of GDP. Yes or No, austerity is here to stay.