Possible scenarios for Greece and the Eurozone

In my reading, the message that the Greek people is sending to the Europeans is the following: We want to end insecurity one way or another. Either take your decision and kick us out, or if you don't, start making real investments for growth in Greece. But whatever you do, give us a long-term perspective so that we can start working on this. Now you might question if a clear decision, one way or another, will really end insecurity, but in my mind the sovereign has spoken: Stop kicking the can down the road.

All decisions will take time, because several Eurozone governments need to get new negotiating mandates from their Parliaments. That means, if the ECB does not extend the lifeline for Greek banks beyond the next few days, negotiations need not even begin.

Europa carrying the Euro - Statue outside the European Parliament   
- CC BY-NC Sean_Marshall

If the Greek banks survive the next few days and weeks, in my view there are several medium-term scenarios from the viewpoint of the Europeans:

Scenario 1) Announcement of a haircut for Greece, probably over time and conditional on real structural reforms. This would be the responsible choice and Cyprus has shown leadership already, but this means a loss of face for those politicians who promised their electorates full repayment. They will need to suggest the haircut to their electorates and Parliaments in a way that doesn't lead to massive resentment. But the truth is: If the creditors do not agree to a partial voluntary haircut, a full unwanted haircut will come along with a Grexit. But even if our politicians have the courage to voice this message, Scenario 1) still carries an incalculable risk about Portugal, Spain and Italy. They might ask for a haircut themselves, and a European debt conference would have to be called. Would this be the end for the Eurozone?

Scenario 2) Stopping all discussions and all financing immediately, kicking Greece out and redoubling support for the "good" reformers Italy, Spain and Portugal while sending humanitarian aid to Greece. Message: Greece didn't play by the rules, and we prefer a strong Eurozone without Greece to a weak Eurozone with Greece. This would lead to a total haircut for Greece but at the cost of a Grexit and probably massive humanitarian hardships. This is what the populists in the Northern European countries have asked for all the time - but I doubt the Eurozone governments want to take responsibility for such an irreversible decision.

Scenario 3) A solution somewhere between Scenarios 1) and 2) which allows Greece to stay in the Eurozone. But I suspect that any deal must include some sort of a haircut or else Tsipras will not agree. Are the creditors willing to agree to a haircut?

Scenario 4) Kicking the can down the road again, bleeding Greece out: starting negotiations but without coming to an agreement, stopping ECB emergency loans and waiting until the Greek banks run out of money and disaster runs its course. This would lead to a Grexit as in Scenario 2, except that the Europeans can deflect the blame ("we tried all we could, but the Greek government didn't agree").

The finale for Greece and the EU

The #Grexit debate has reached its peak. The next two weeks will decide if Greece stays in the euro or not. This is the biggest crisis that the EU has faced in a long time and probably its biggest crisis ever.

It is becoming clear that the Greek government will probably force the other Eurozone countries to choose A or B: Continue lending money to Greece without conditionality, or bear responsibility for Greece's exit from the euro. Whichever way you turn it, there are only bad solutions left.


Solution A: Keep on lending money to Greece without conditionality

• No substantial improvement for the Greek people in the near future
• More money needs to be transferred to Greece without guarantee that this money will be paid back
• Negotiations for a third bailout package may need to start so that Greece can pay back the remaining outstanding debt
• Public opinion in many other Eurozone countries will turn downright hostile toward the EU, right-wing parties will become more powerful. In the worst case, people will be so disappointed and disgusted by this European Union that we will see the breakup of the European project.

Solution B: Exit of Greece from the Eurozone

• All funds given to Greece are lost
• Massive economic and social problems for the Greek people, for example because the price of imported medicine will sharply increase as the drachma devalues
• Massive financial loss for the French and Italian governments which together own 38% of the Greek government debt
• Possible knock-on effects in Portugal, Italy, Spain which may strive for an exit from the Eurozone themselves to avoid further painful restructuring of their economies
• Massive speculation against the stability of the euro which in the worst case may lead to the collapse of the Eurozone

This is a huge challenge for our politicians and for European solidarity as a whole.  Nobody wants the European project to break apart, but whichever scenarios is chosen, it will create massive losers.

Europe's politicians are just as fed up with this entire situation as the European people, but it is now absolutely fundamental that our politicians keep a cool head. Otherwise, we may look back to the next two weeks as the beginning of the end of the European project.