The EU must accept it has slipped up on Greece

“Greece’s private creditors are the lucky ones” – those were the words of economist Nouriel Roubini writing in the Financial Times in 2012 after the country's second bail out. Describing the process by which private sector claims were mostly turned into official ones, Mr Roubini went on to declare: “Official creditors will be left to suffer most of the huge additional losses that remain likely on Greece’s still unsustainable debt in future.”

This goes to the heart of the problem with Greece and the eurozone. The bail-out was more about stopping contagion in the markets and protecting the sanctity of the eurozone than it ever was about finding a viable solution for Greece. Even though Greek governments may have dragged their feet on reforms it is difficult to argue that a restructuring that causes the economy to contract by 25% was ever on the right path. This has made the national debt even larger in relation to gross domestic product – now at 175% – and more unsustainable. 

The reality is that Greece is so uncompetitive in euros it is difficult to see how it can be transformed without a massive devaluation. But being inside the eurozone this is impossible, so instead there have been widespread job losses and wage cuts without much of a result – except to turn large parts of the population radical at either the left or right extremes of the political spectrum. 

The hardline stance of the eurozone’s big powers – Germany in particular – is being taken because they cannot admit to their own taxpayers that the bail-outs were fundamentally flawed and that now they are on the hook. In fact, there is an even bigger mea culpa to get to grips with – the design of the eurozone itself is fundamentally flawed. 

The eurozone’s political class is nowhere near to owning up to this fact, so instead they have been threatening the Greeks with a Grexit. The problem is that if you are already without a job and living on 10 euros a day, you are not particularly scared because things are already terrible.  

A Grexit would significantly undermine the eurozone because investors would then become nervous every time a country looked to be in trouble – Italy might be the next target. Also, the official creditors would still lose their money as Greece would be unable to repay. In Greece itself, things would get worse for a couple of years but then might start to turn around. 

All of this means that following the No vote in the referendum a deal is still in everyone’s best interests. If Greece is forced to leave, it will be a political decision rather an economic one. Meanwhile, private sector creditors including French and German banks who complained about the haircuts they took back in 2012 should be realising how fortunate they were.

Brian Caplen is the editor of The Banker.