Can Greece Rescue Itself?

JUL 6, 2015 4:48 PM EDT

By The Editors

Bloomberg

Greece has given Prime Minister Alexis Tsipras what he asked for: It has rejected the terms offered by its creditors for further financial help. With this vote, the country has taken a bold stride toward a political and economic precipice.

It's now for Tsipras to decide whether Greece goes over the edge. To avoid it, he will need to astonish the creditors and everybody else by reinventing himself -- immediately. In the meantime, Europe must plan for Greece's exit from the euro system.

In one way, you could say the referendum hasn't changed much. What's at stake for both sides is the same as it was before. Greece and its creditors aren't far apart on the fiscal conditions for new support. And there's wide agreement on the need for new debt relief. The International Monetary Fund, which has taken the lead in these calculations, agrees with Athens that Greece's debt needs further restructuring.

The problem is not the distance between Greece and its creditors but the complete breakdown in relations between them. For this, Tsipras and his team are mainly to blame. They've refused to acknowledge the Greeks' part in their own downfall, and the need for a new fiscal culture that disciplines spending and collects taxes owed. Sunday's vote may very well have made this breakdown impossible to repair.

Greece is already in arrears to the IMF, and its banks have had to close. Without help from Europe, and especially from the European Central Bank, outright financial collapse will follow, and Greece will be forced to start issuing its own currency.

For Greece, the immediate prospect would be financial chaos. If polls are to be believed, the vast majority of Greeks want to remain in the euro system and be partners in the wider European project.

Despite everything, avoiding a break from the euro would serve Europe's interests, too. The direct cost to the creditors of outright default would be upward of 200 billion euros; the cost of further debt restructuring would be far less. What's more, a dismantling of the euro system would set a bad, destabilizing precedent for the next crisis. And geopolitics point the same way: The last thing Europe needs in its southeastern corner is a new zone of instability and disorder.

But such calculations count for nothing if Greece's government can't be trusted to keep its word. 

German Chancellor Angela Merkel and French President Francois Hollande have called a summit of EU leaders on Tuesday evening. What needs to happen between now and then?

Above all, Tsipras must try for the first time to get a grip on reality. His vote of confidence is a hollow victory that gives him no more power over the rest of the EU than he had to begin with -- which is roughly none. Much of Europe has had enough of Greece and its government. Some EU finance ministers think it would perhaps be better to push Greece out of the system right away and concentrate on managing the consequences. After the past five months, it's hard to disagree.

To win them around, Tsipras needs to spend the political capital he's just won to face down his party's Marxist ideologues and accept stronger economic reforms.

If a new Tsipras springs forth, the euro area and its leaders should respond. Without relaxing their insistence on conditions, they should talk about immediate assistance for Greece's banks and further debt relief. But if Tsipras refuses to change, it will be time to call a halt.

Sunday's vote was a cry of desperation as much as it was an act of provocation. Yet Europe's leaders are entitled to ask whether Greeks understand the role they must play in their own salvation. Between now and the summit, the onus is on Tsipras and his country to show Europe that, despite everything, they deserve to be helped.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.