The leaders of the 19 countries that use the euro will hold a crisis summit Monday to try to avoid a financial default by Greece, and possibly its exit from the euro group.
Greece doesn’t have enough money to make multi-billion-dollar payments to the International Monetary Fund and the European Central Bank. The first payment is due June 30.
The country’s creditors are demanding more austerity and reforms to make money available for Greece to make the payments, and Greece’s new leftist government is refusing, backed by considerable public support.
Since the financial crisis of 2008, and the austerity program imposed by Greece’s creditors, the Greek economy has shrunk by 25 percent - a huge amount in economic terms – while unemployment has skyrocketed and government services have been cut.
The increasingly acrimonious dispute has led to concerns that Greece will miss the IMF payment and go into default, and that that could trigger a banking crisis and force Greece out of the currency union, resulting in an even worse economic downturn and shaking the credibility of the euro.
“The situation is really severe, and an agreement is urgently needed,” said Zsolt Darvas of the Bruegel Institue in Brussels, speaking to VOA via Skype.
“If a credible agreement would be able to remove the uncertainty about Greek membership, then I think the Greek economy would start to grow,” he said.
Still, Darvas is worried.
“My fear is that the agreement will not be comprehensive enough to restore trust,” he said. “And certainly that could continue to have a negative impact on bank deposits in Greece, and more generally on the Greek economy.”
But Associate Professor of Economics at Britain’s University of Warwick, Dennis Novy, expects neither success nor disaster at Monday’s summit.
“Somehow, you create the expectation that if there is an amicable solution to this, things will be fine,” he said. “They won’t. It’s more of a continuous path, as opposed to some big cliff.”
“I do not expect any major deal,” he added. “I think we’re going to see more muddling through. This is going to drag on for a long time. And it will be a messy process for months, if not years, to come.”
And Novy is not all that concerned about the prospect that Greece could miss a payment and technically be in default of its obligation to the IMF.
“It’s almost semantics to say whether you give somebody a lower interest rate or you stretch out the repayment period or actually you don’t make a particular payment,” he said. “The contrast is not as steep as you might think.”
Novy says default would not immediately create a crisis because key creditor nations like Germany and France want to avoid a Greek departure from the euro.
Experts say what is known as a ‘Grexit’ would cause concerns in the financial markets that other economically troubled countries could leave the euro, and could encourage such countries to do so, potentially leading to a severe weakening of the common currency system.
“This is about a bigger European project that’s at stake here,” Novy said. “And I very much doubt that the main European leaders, certainly not the German Chancellor, Mrs. Merkel, would want to risk a Greek exit. I think she doesn’t want to go down in history as being the chancellor to really damage the European project in such a fundamental way.”
Still, European leaders don’t want to create a precedent of giving what they see as too many concessions to Greece, concerned that other countries would demand the same.
Novy says in this seemingly unsolvable problem it’s important to remember that the Greek economy is only 2 percent of the euro zone, and that the further reforms it is being asked to make are small, compared to what it has done over the last six years.
In other words, he says, beyond the political grandstanding on both sides, the issues are not as big as they have been in the past, and both sides have considerable incentives to avoid a crisis.
Zsolt Darvas also thinks the two sides are closer than they appear to be. “In a number of questions, the points of view of Greece and official lenders have converged quite a lot,” he said.
Still, he says any agreement will likely only solve the problem for a matter of months, at most, with more crisis points emerging for Greece and its creditors for years to come.