The bailout deal negotiated between Greece and the eurozone was yet another example of bad EU decision making. It only partially addresses the problems which the Greek economy faces. It also confirms the structural weaknesses at the heart of the European monetary union. If it does prove to be the end of the game, then it is one with no winners.
In simple terms, Greece has obtained a third bailout at terms which are not markedly better than those rejected by voters in last week’s referendum. There is the small carrot, but no guarantee, of future debt reduction or a pause in debt repayments. In exchange Greece has surrendered its fiscal sovereignty to the EU. Indeed, it has capitulated other aspects of its economic governance.
The Eurosummit statement published on July 12, clearly sets out the stark ultimatum demanded by the hardliners at the summit – including Germany, Finland, Austria and the Netherlands – who welcomed “the commitments of the Greek authorities to legislate without delay.”
There follows a list of requirements to streamline and increase VAT, reform pensions, introduce quasi-automatic spending cuts in the case of missed fiscal surpluses, and a reform to streamline the judicial system. Some measures must be agreed by the Greek Parliament by Wednesday, and the rest by the July 22 at the latest.
A punishment that fits the crime?
In addition there needs to be a clear path, with clear milestones, towards pensions, energy and labour markets reform. The diktats also extend to liberalising Sunday trade, pharmacies, the sale of milk and bread. One wonders about this level of detail. It’s doubtful that it was driven by a need to improve the efficiency of various aspects of Greece’s retail sector. Some have speculated that it’s an attempt to punish Greece for the current crisis.
Greece also has to escalate its privatisation programme, which the Syriza government had opposed, and which will be used to reimburse loans obtained through the European Stability Mechanism (ESM) programme. Some €50 billion will be used to recapitalise the banks and to reduce its debt-to-GDP ratio. At one stage of the negotiations it had even been suggested that this forced savings fund from privatisation might be held in Luxembourg, out of reach of the erring Greek government.
In exchange, Greece gets a third bailout from the ESM Programme of around €82-86 billion. It also allows for bridging finance of €12 billion to tide Greece over on its repayment obligations until early August. There is a suggestion that future lending might be possible including longer grace and repayment terms, but nothing firm.
Objectively this doesn’t seem better than any deal which Alexis Tsipras’ government might have negotiated before the referendum. Yanis Varoufakis, the abrasive former Greek finance minister who resigned after the referendum vote to ease the negotiations compared the deal to the Treaty of Versailles. It does raise the question of why prime minister Tsipras accepted the deal. The explanation is probably that he knows (and the hardline eurozone countries knew) that even though a majority of Greeks voted No (or rather “Oxi”) to previous bailout terms, they clearly did not want to leave the euro. There is little evidence that a Grexit would provide a better path for Greece out of this crisis.
So is this then a triumph for the eurozone? The EU comes out of this very poorly, on three grounds. First, whilst the reforms might (very, very slowly) improve the supply side of the Greek economy, there is little in the deal to address the lack of domestic demand which the resumption of austerity policies will impose. Indeed, the capital controls which are stopping Greeks getting their cash out of ATMs – and which will continue for a time – still act as a drag on the economy.
Second, the deal does not address the issue of debt sustainability, and this will have worsened during the last few weeks.
Third, and more importantly, this deal sets the scene for how future crises will be handled in the eurozone. We have seen division, acrimony, and the triumph of disunity. Exactly the opposite of the driving force behind the closer economic (and political) union which a shared currency was designed to create. Indeed, it’s worth remembering that countries such as France and Italy saw monetary union as a means of moving away from a fixed exchange rate mechanism which was seen to privilege Germany as the surplus country, forcing adjustment on the deficit countries.
Instead, monetary union was designed in the image of Germany: with a fiscal decision-making system which still means countries with strong fiscal balances hold the upper hand. There is no formal mechanism to even up the economies of the weak and the strong, or any method to share the debt burden through mutualisation, as would be expected in a true federal state. The European Central Bank, meanwhile, is independent, but unlike the Bank of England or the US Federal Reserve, is not subject to scrutiny by a single central political authority in its defence of the currency and banking system. The eurozone is a fiscal confederation rather than a proper federation.
In the circumstances there are few plaudits for anyone. An immediate Grexit has been averted. But even if all goes as planned in Brussels, and the Greek (and German and Finnish) parliaments approve the deal, the resolution of the Greek debt crisis will take a long time. Longer than the years it took Odysseus to return to Ithaca in Homer’s poems. But, unlike Homer, there are few heroes to be found in this saga.