Pain Without End

July 18, 2015 edition of The Economist|

“We have an a-Greek-ment,” declared Donald Tusk, president of the European Council, on the morning of July 13th. Mr Tusk’s little joke seemed forgivable at the time: after talking through the night, euro-zone leaders had thrashed out a deal that averted Greece’s imminent exit from the single currency. The reality is grimmer. A decent deal would have put Greece on the path to sustainable growth and taken the prospect of Grexit off the table. Instead, Europe has cooked up the same old recipe of austerity and implausible assumptions. The IMF is supposed to be financing part of the bail-out. Even it thinks the deal makes no sense.

Greece unemployment rate chart

True, some ideas are useful. In exchange for talks on a package estimated at €82 billion-86 billion ($90 billion-94 billion), the creditors have put structural reforms higher up the agenda than in the two previous bail-outs. That is welcome: opening closed-shop industries to competition is a surer path to growth than austerity is. But even if they are carried out, structural reforms take a long time to pay off. In the meantime, the Greek economy is suffocating because of bank closures and capital controls. The agreement does too little to ease this chokehold.

The creditors are concocting a bridge-financing package designed to prevent Greece from defaulting to the European Central Bank (ECB) on July 20th. But money will not flow until reforms have gone through the Greek parliament (a first batch was passed on July 15th) and the details of the bail-out are settled. Money will also be made available to recapitalize the banks, but the extent of their capital shortfall will only be clear after the summer. The ECB can meanwhile keep the banks afloat with emergency financing, but capital controls will remain. Given the possibility that losses will be imposed on creditors, the incentives to put money into Greek banks are non-existent. The IMF increased its estimate of Greece’s financing needs by €25 billion after only two weeks of banking limbo; as today’s misery drags on, the hole will deepen.

Even now, there is a huge financing gap to fill. One hope is privatization: the agreement requires Greece to transfer assets to an independent fund that will generate €50 billion by selling them off. Fat chance. Over the past five years Greece’s government has managed to raise a grand total of just €3 billion from asset sales.

In another triumph of wishful thinking, the deal also reckons Greece can soon borrow in private markets. Although previous bail-outs have greatly reduced the burden of interest payments to euro-zone creditors, which start only after 2020, Greece’s debt stock is now projected to peak at 200% of GDP. No private creditor is going to lend money to Greece at reasonable rates when its debt load is unsustainable. The only option—one that has, miraculously, united Alexis Tsipras, the Greek prime minister, and the IMF—is debt relief. Yet the euro zone has ruled out forgiving any debt outright, and put off the decision of whether to extend maturities for another day.

That leaves the old standby of austerity. Among the initial measures passed by the Greek parliament on July 15th was one leading to “quasi-automatic spending cuts” in the event of shortfalls in Greece’s budget targets. If those cuts were ever enacted, they would only harm the economy further. The politics are little better. Marshaling ongoing domestic support for the bail-out in Greece, with his own left-wing Syriza MPs in revolt, will be an enormous problem for Mr Tsipras (see article). Years more hardship will only radicalize a country that is already a haven for the hard left and the fascist right.

The hokey-cokey currency
If Greece trips up, whether in the coming days or quarters, Grexit will immediately hove back into view. This week Mr Tsipras saw what a strong negotiating position really looks like, as Germany’s irascible finance minister, Wolfgang Schäuble, openly dangled plans for a temporary Grexit. That idea was excised from the final agreement, but too late. Germany’s unshakable commitment to the irrevocability of the single currency has gone and it cannot be reinvented. Greece must toe the line, or get out. The summit made it clear that Greek membership of the euro is transactional and contingent.

Greece and euro crisis chart

Plenty have called the agreement a coup d’état; Mr Tsipras himself talks of having had a knife at his throat. That conveniently ignores his own culpability in sowing mistrust among the other 18 euro-zone members: his decision to break off negotiations and call a referendum earlier this month squandered any political capital he had left in Brussels.

The summit has deepened the tension between sovereignty and stability that bedevils the euro. If it is to work, the euro zone requires more fiscal centralisation. But the Greek referendum and this week’s deal have laid bare the trade-offs involved, away from national self-determination and towards more intrusive external control. Saving Greece is hard enough; securing the euro will be tougher still.


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