World

A tough love plan: Greece gets a new lease of European life

By J Brooks Spector 14 July 2015

The euro zone nations have now reached agreement how to keep Greece in the euro zone and begin the business of sorting out that nation’s messy finances. This happened even as the Northern European nations largely refused to budge on making the Greeks pay for all of their five-year financial party fun. J. BROOKS SPECTOR takes a first look at what happened and what it may mean.

After five years of lurching from one crisis to the next regarding the Greek economy, one thing has clearly now run dry. The metaphor bank is now seriously overdrawn. We have had a whole raft of Greek tsunamis and Greek dramas, as well as various versions of Greek slides down hill, until almost everyone has been left virtually speechless in summing up what has been happening in a nice, tight metaphor or bit of word play.

About the only thing left seems to be movie metaphors. Accordingly, this writer proposes that this latest bit of hard going in Brussels – primarily between German Chancellor Angela Merkel and Greek Prime Minister Alexis Tsipras – has been like a cinematic confrontation between It’s a Wonderful Life’s heartless banker, Mr Potter and Zorba the Greek’s, well, Zorba. Or perhaps, Never on Sunday’s Illya… Think about that one for a minute or two.

Regardless of which film character we choose, however, what finally has happened is that Tsipras huffed and puffed and asked his fellow Greeks to vote against the terms of the European Union’s (EU) bailout offer in a referendum last Sunday. Then, when they dutifully turned down the offer that had already been withdrawn by the EU, he went into negotiations with the other EU euro zone nations and came back with, well, a deal tougher than the one he (and his fellow Greeks) had earlier rejected. Excellent work, one might say, but only with a raised eyebrow and a sardonic scowl on one’s face, perhaps.

In truth, however, there really was no choice for Tsipras. Greece had already technically rolled past the date of a first default on its promissory note to the IMF that came on 30 June – and it was now headed to its ‘come to Jesus’ moment with yet another huge bill due, this time to the European Central Bank on 20 July for a really big splodge of wonga that it didn’t have for this awkward moment either.

In fact, there has been no real hope of finding another international financial angel prepared to lend (really, to give) them a zillion euros or thereabouts to make things work out. And the Germans, along with the Scandinavians and most of the Eastern European euro zone members, were clearly not of a mind to reach a deal whereby the creditors took one of those monetary haircuts and the Greeks merely received an honorary spanking for what was clearly seen as their profligate ways, some truly innovative government bookkeeping, and their uniquely lax tax regimen.

Moreover, there was simply no more money in the national kitty to keep the banks accessible for more than the barest minimum of withdrawals via ATMs of €60 per person, per day, let alone carry on the pretence of engaging in a bank’s normal business of lending for business purposes. And there probably isn’t the money left in the country, absent an agreement for this bailout, to pay government salaries, pensions and other miscellaneous accounts either when they come due later this month. And so, the inevitable direction of this agreement became fixed, despite all the brave talk. From the Greeks’ perspective, it might well have been termed a Carthaginian-style peace, rather than a 21st century Brussels one.

Now Tsipras is in the unenviable position of having to bring his newly won agreement (or capitulation to the rapacious Mr Potter, depending on your perspective) back to a particularly fractious Greek parliament to gain their agreement by Wednesday. This week. This is to be done despite the fact he is facing a near-rebellion among his own troops within his Syriza Party over the agreement and the fact that he will almost certainly have to rely on opposition parties to pass this pact.

This deal means Greece has had to agree to a raft of austerity measures, including major VAT tax hikes, changes in pensions and state owned and operated enterprises, and the liberalisation of the national labour market, among other painful remedies. The real payoff – despite all the pain – will be some €85 billion in new loans and other financial support over the next three years and the preservation of Greek participation in the euro. If Greece finally meets all of the requirements in the agreement, Greece gets this three-year rescue programme and a commitment to help it restructure its debt, a burden that now stands at an unsustainably high level of some €320 billion, or 180% of the country’s actual GDP. Putting the best possible face on the deal, Tsipras seemingly gritted his teeth and said, “We managed to avoid the most extreme measures,” insisting he had successfully convinced his nation’s creditors to drop their insistence Greek assets be transferred abroad as collateral.

In specific terms, the Brussels agreement says the Greek parliament must immediately adopt the following:

  • A commitment to liberalise the labour market and the Greek ferry transport sector, privatise the electricity network and extend shop opening hours;

  • The euro zone agrees in principle to start negotiations on a loan package for Greece worth €82 billion-86 billion (£59 billion-£62 billion; $91 billion-$96 billion);

  • The loan will come mainly from the European Stability Mechanism (ESM) the euro zone bailout fund. But the International Monetary Fund will also be asked to make a contribution from March 2016;

  • A new trust fund will be set up, managed by Greece, with €50 billion of Greek assets. It is a mechanism for paying off part of the total ESM loan. Half of the €50 billion will be used to fund recapitalisation of Greek banks, the other half will go towards reducing Greece’s debt mountain by privatising assets and investing in Greece;

  • Greece will get short-term bridge financing to avoid bankruptcy separate from the ESM. The amount is estimated to be €7bn by next Monday and another €5 billion by mid-August;

  • Out of the total ESM loan about €10 billion will be used immediately to recapitalise Greek banks but the banks may need €25 billion in total;

  • The European Central Bank, euro zone finance ministers and the IMF will tightly monitor Greek compliance with the bailout conditions;

  • Negotiations on the ESM bailout will begin only after the plan is approved by the parliaments of Finland, Germany and Greece;

  • The euro zone is ready if necessary to extend the repayment period of Greek debt (by debt rescheduling), but debt will not be written off (i.e., no ‘haircut’. The so-called ‘haircut’ was the measure the Tsipras’ government had been eager to obtain agreement on.); and

  • The European Commission will try to mobilise €35 billion outside the ESM loan to help Greece with growth and job creation.

Even with this agreement, it seems things are not entirely sorted out – not by a long shot. Greece’s creditors have said they would help it in the short run to repay its debts since a full agreement on the third bailout still lies ahead. But in the meantime, Greece still needs help to deal with that €4.2 billion debt repayment due on 20 July, in addition to those €1.5 billion in arrears to the International Monetary Fund. Even after the Brussels agreement, a number of the euro zone parliaments must also give their agreement to the agreement, in addition to Greece’s parliament, before the new bailout actually takes effect.

The agreement had its cheerleaders. European Commission head Jean-Claude Juncker told the media, “There will not be a ‘Grexit’,” thereby implying that if there had been no last-minute agreement, there might have been nothing to prevent Greece from being forced to carry out a disorderly departure from the euro – a “Grexit” – as a last refuge to prevent national financial catastrophe. For his part, Tsipras had added he too had the “belief and the hope that… the possibility of ‘Grexit’ is in the past. The deal is difficult but we averted the pursuit to move state assets abroad. We averted the plan for a financial strangulation and for the collapse of the banking system”.

Nevertheless, despite all the brave talk from Tsipras and the fact of this agreement now pending agreement by his parliament, his nation’s citizens will face measures likely to be tougher on them than what had originally been offered them by the EU before Tsipras’ referendum. Even a group of his own legislators called the result the “worst deal possible… that maintains the country’s status: a debt colony under a German-run European Union”.

Assuming the agreement is approved by the national legislature, Greece will be harnessed to a tight timetable to implement all these new reforms. This is a concrete manifestation of just how little trust in Greek promises now remains among its erstwhile partners in the euro zone. Making this point explicitly, Angela Merkel had said bluntly, “Trust needs to be rebuilt. Greece has a chance to return to the path of growth.” Although French president Francois Hollande was presumed to be less hard-hearted about the negotiations, perhaps contemplating other troubled economies, after the deal was struck, he said that losing Greece from the euro zone would have been akin to losing “the heart of our civilisation.” And not incidentally, it might well have signalled the starting gun of the breakup of the entire euro project.

Still, even if the Greek parliament signs on after all the obligatory screaming, biting and scratching, Greece’s problems are nowhere close to being overcome. Eswar Prasad, professor of trade policy at Cornell University, told media after the agreement was announced, “This agreement pulls Greece back from the brink of economic chaos but remains far from ensuring its long-term economic viability within the Eurozone. Greece will face many challenges in delivering on the package of reforms it has promised… The Greek economy faces a wrenching period ahead as it copes with economic, social, and political instability resulting from tough fiscal discipline, sweeping reforms, and an eviscerated social safety net.”

For starters, as far as Greek citizens are concerned, whether their banks will be able to reopen any time soon will depend on whether the European Central Bank decides to allow the banks to draw on more emergency credit from the ECB. But, this may only happen after the obligatory, initial reforms are actually passed by the Greek parliament and everybody is happy with the results – outside of Greece, that is. Thereafter, Greece will be required to open up industries that have been protected for years to more competition, such as the energy sector and the inter-island ferry transport business. Going forward, Greece will be harnessed to a strict timetable to implement this raft of new measures – a concrete reflection of how little its EU partners and others now trust the Greek government to honour their deal.

Looking back over recent history, Greece’s handling of previous promises was likely what must have triggered Merkel’s suspicions. In the past five years, Greece has already received two bailouts for a total of €240 billion, in return for promises to carry out major spending cuts, tax increases and other reforms – measures agreed to by previous Greek governments. In fact, the country’s budget deficit has fallen significantly, but the country’s public debt burden has actually grown as the country’s economy has shrunk by around 25% as a result of the austerity measures and the financial crisis hangover after 2008-9.

The picture is still cloudy as far as the actual workings of the Greek recovery – and it may remain so, well after the actual implementation of the bailout agreement. The ups and downs will have unanticipated implications on international financial markets – with wild swings in the daily results on many bourses, likely depending on how Greek developments are interpreted by the “electronic herd” (columnist Tom Friedman’s term for the investment bankers and traders who shift vast amounts of funds at the click of a mouse in response to market signals as well as their sense of the safety and security of the markets and investments they manage).

Meanwhile, while the euro has been preserved, it has become increasingly clear that the larger euro zone project has elemental flaws that can only be papered over with these current arrangements. As the Washington Post commented after the agreement was signed, “The agreement in Brussels on Monday probably avoids not only an economy-crushing event but also a major reversal for 60 years of increasing European unity. But the story is far from over, with Greece in line for years of economic adjustment (read: pain), and many new doubts about the long-term potential of the euro zone and its capacity to turn the continent into the United States of Europe.”

Now the European nations must decide if the euro zone is supposed to lead to a tighter political union that can, in turn, have increasing control over common financial and monetary policies, or, instead, if they are prepared to accept the possibility of future existential crises whenever another member gets into national financial difficulties. DM

Photo: Greek Prime Minister Alexis Tsipras arrives at his office in Athens, Greece, 13 July 2015. EPA/ALEXANDROS VLACHOS.

In the next several days there will be thousands of analyses and articles on this crisis. In the meantime, for more, read:

  • Greece talks: ‘Sorry, but there is no way you are leaving this room’ at the Financial Times

  • Greece and Europe reach a deal after all, a commentary by Douglas Elliott from the Brookings Institution

  • European Leaders Reach ‘aGreekment’ at Foreign Policy

  • Deal on Greek Debt Crisis Is Reached, but Long Road Remains at the New York Times

  • Greece reaches deal with creditors, avoids euro exit at the AP

  • Greece debt crisis: Eurozone summit strikes deal at the BBC

  • Greece debt crisis: Bailout deal at a glance at the BBC

  • Full text of Brussels agreement, via the BBC

  • What everybody needs to know about the deal to save Greece – and what happens next at the Washington Post

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