Time Politicians Handed Greece an Ultimatum

Time may have come for the eurozone to offer Greece a political solution

By SIMON NIXON

May 27, 2015 4:43 p.m. ET

The Wall Street Journal

The Greek government has spent the past four months demanding a “political solution” to its debt crisis. The time may have come for the eurozone to offer it one.

Until now, Europe’s political leaders have been reluctant to be drawn into the process, preferring to hide behind the officials in the institutions formerly known as the Troika: the European Central Bank, the International Monetary Fund and the European Commission. Partly, that reflects practical and legal reality: elected politicians do not have the capacity or capability to negotiate the details of bailout programs.

But it also reflected a political reality: no one wanted to be seen to be sitting in judgment on a fellow eurozone member state’s budget. They preferred to stay one step removed, providing time and space for an inexperienced government to reach its own agreement with the creditors, reflecting its own political choices while respecting eurozone rules.

But the reality is that the bailout talks have gone—and appear to be going—nowhere. Despite daily assurances from Athens that a deal is imminent, eurozone officials say that the two sides remain “miles apart.”

Deadlines have come and gone: no one now expects a deal by the end of May, agreed only last week. Athens still resists key reforms to its pension system and labor market that its creditors consider essential to Greece’s long-term prospects while continuing to unpick earlier reforms.

Eurozone governments were never under any illusion that it would be hard to reach a deal with Prime Minister Alexis Tsipras, whose radical left Syriza party had won the election on a platform of tearing up the bailout agreement, rejecting austerity and embarking on a fiscally expansionary program. But Mr. Tsipras had also campaigned on a commitment to keep Greece in the eurozone.

They assumed that when the financial pressure mounted, it would be this part of his mandate that he chose to honor. They assumed that his party would back whatever deal he agreed, or that he would dump his government’s hard-liners and seek backing from pro-euro opposition parties.

But these assumptions look increasingly misplaced. For all Syriza’s talk of tackling corruption and clientelism in Greece, it has shown little interest in reform in its first four months in power. It has come up with no ideas of its own to turn Greece into a functioning modern economy. Instead, it appears to be more interested in turning back the clock. At a meeting last week, 75 out of 160 senior Syriza members voted for an immediate “rupture” with creditors. The other 95 backed a compromise proposal from Mr. Tsipras to continue the negotiations but set red lines on reform of pensions and labor laws that the creditors will never accept, raising the possibility that Mr. Tsipras might struggle to get his party behind a deal.

The danger of an accident is now extremely high. Greece owes €1.6 billion ($1.74 billion) to the IMF in June and some government officials have warned that without a deal it is likely to miss a payment. Of course, Athens has issued many such warnings before. But this time it may be telling the truth. Meanwhile, the clock is ticking to the expiry of the current bailout agreement at the end of June, at which point the money currently earmarked for Greece will cease to be available. Worse, the process by which bailout funds can be disbursed is complicated. It could take several weeks to gain the necessary legal and parliamentary approvals.

To avoid a disaster, eurozone governments may now need to take political responsibility. One reason that negotiations have dragged on so long is that officials are understandably reluctant to take any step that might bring the crisis to a head, leading to accusations of overstepping their authority. Arguably, the ECB should long ago have tightened the terms upon which it allows Greek banks access to its emergency facilities. But as an unelected institution, it is reluctant to take a step that might lead to bank runs and capital controls. Meanwhile the IMF is worried that European governments are making their own aid conditional on IMF participation.

But this reluctance to pull the trigger on Greece may now be worsening the crisis. The stalling by creditors in setting firm deadlines or making ultimatums is feeding the belief that the eurozone is keeping its options open for a final concession, encouraging Athens to prolong its brinkmanship, increasing the damage to the Greek economy—and the eventual bailout bill for the eurozone. It is also allowing Athens to paint a picture of creditors divided among themselves, contributing to a narrative of the EU unable to make decisions, paralysed by its own structures.

That’s why the time may have come for eurozone governments to hand Athens an ultimatum: a take-it-or-leave-it deal with a clear deadline. This ultimatum would include an explanation of what the eurozone has done and is willing to do for Greece, what it requires from Greece in return and the reasons why.

It would also spell out the consequences of rejection, which would be to provide the ECB with the political cover to stop funding the Greek banking system.

Of course, this would be a high stakes move. But the risk of sleepwalking to an accident is also high. Besides, an ultimatum would also ensure that a euro exit is a deliberate sovereign Greek decision: that may prove particularly important in the debate over the long-term viability of the rest of the eurozone that is bound to follow.

Write to Simon Nixon at simon.nixon@wsj.com