Does a Temporary Grexit Still Loom?

The likelihood of Greece leaving the Eurozone increased considerably as Germany hinted at forcing Greece to leave the Eurozone for a fixed period.

The likelihood of Greece leaving the Eurozone increased considerably as Germany hinted at forcing Greece to leave the Eurozone for a fixed period.

Over the weekend, a document was leaked that suggests Greece be forced to exit the Eurozone for “at least the next five years” only to re-enter after its debt load had settled and it maintained a budgetary surplus. The Wall Street Journal reported that the document sent by Thomas Steffen, Germany’s State Secretary of Finance. European policymakers have denied the possibility of forcing Greece to leave the Eurozone for a short period. “There is no temporary Grexit. There is only Grexit or not Grexit,” said French President Francois Hollande on Sunday.

The document listed several requirements for Greece to receive bailouts from the European Union to help continue paying its debts. Many of those requirements include limiting the country’s control of its own fiscal policy, which would need approval by external groups and creditors, including foreign financiers and European Union policymakers. “The government needs to consult and agree with the [European] institutions on all draft legislation in relevant areas with adequate time before submitting it for public consultation or to Parliament,” the document said.

French and German policymakers reiterated the offer to help Greece restructure its debt, which Greeks have rejected as a form of bankruptcy that will only worsen the country’s economic condition. Meanwhile, French policymakers have said in meetings the need for an agreement to keep Greece in the Eurozone.

German policymakers have made sterner statements against the likelihood of a deal with Greece. “There’s not going to be an agreement at any cost,” German Chancellor Angela Merkel said, hinting that Greek policymakers have not negotiated in good faith. “The situation is extremely difficult if you consider the economic situation in Greece and the worsening in the last few months, but what has been lost also in terms of trust and reliability,” Merkel said.

An Old Offer

Markets rallied last Friday and many commentators breathed a sigh of relief on news that a Greek proposal involving large cuts to spending and tax increases was submitted to creditors and the European Union. The Greeks offers to increase corporate taxes to 28% from 26%, establishing a 23% VAT for some items, and a cut on pension spending worth as much as 0.5% of GDP in 2015 and 1% of GDP next year. Greece also offered to privatize a number of assets.

The Greek proposal targets a budget surplus of 3.5% by 2018, increasing steadily from now until then. Conservatives throughout the EU and particularly in Germany heralded the proposal, who note the details of the proposal are very similar to a previous proposal that creditors in the EU had offered the Mediterranean country. Some commentators argue the new proposal demonstrates the desperation of Alexis Tsipras, the Greek Prime Minister, in keeping the country in the EU.