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The dog ate Greece’s homework again, but a debt deal is closer

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A demonstration in front of the Greek parliament in Athens.Photograph by Louisa Gouliamaki — AFP/Getty Images

Europe’s currency union veered away from the rocks again Monday, both sides showing just enough flexibility to sustain hopes of a deal that will prevent a first-ever default by an E.U. member and the unravelling of the bloc’s biggest prestige project.

But any suggestion of progress was soured by the way in which it was achieved: Greece’s Finance Ministry negotiators first delayed sending their new proposals to the European Commission and to fellow governments until the dead of night on Sunday, and then sent the wrong documents. By the time they sent the right ones, there was no longer time for the Finance Ministers who had descended on Brussels for an afternoon meeting to prepare a detailed recommendation to their heads of government, who were due to meet over dinner.

The confusion effectively stripped the summit, called only last Thursday to break the deadlock over releasing the last billions of Greece’s 2012 bailout program, of its purpose. As a result, the leaders will now have to cram the issue of saving Greece into a planned summit meeting later this week, which was intended to focus on an even bigger crisis: the massive surge in migrants from Africa and Asia trying to reach the E.U. via the Mediterranean Sea. Over 100,000 migrants have arrived in Greece and Italy so far this year, and it is estimated that at least 1,000 have died trying.

It was the latest in a series of communications failures by Greece’s left-led coalition government since it took power five months ago, a process that led to Christine Lagarde, the head of the IMF, complaining last week that there was no use continuing unless there were “adults in the room.” Many of the ministers arriving struggled to conceal their anger at the shambles, with two joking bitterly about sending the bill for their plane tickets to Athens.

E.U. Council President Donald Tusk’s statement before the summit had sounded more like referee’s warning before a boxing match, calling on all parties to respect one another and to end a “blame game” that “leads nowhere.”

“The most important thing is that the leaders take full responsibility for the political process to avoid the worst-case scenario,” Tusk said.

As the summit dragged on (it took them over five hours to come to the inevitable non-decision), some details of Greece’s new proposals leaked out, suggesting Athens will accept the creditors’ key demands of broadening the tax base by removing VAT exemptions. Under the proposals, Greece will raise its standard VAT rate to 23%, but keep a discounted rate of 13% for energy, basic foods and the crucial hotel industry. The first two elements of that speak to the government’s agenda to spare the poorer population any new hardship, while the third is more about keeping the tourist industry, which is key to the country’s long-term recovery, competitive.

That pleased the creditors, but infuriated the anti-bailout right-wing junior partner in the left-led coalition in Athens, and is likely to have a similar effect on the hardline left-wingers in Prime Minister Alexis Tsipras’ Syriza party–especially as there was no indication of when, if ever, the creditors would offer any sort of relief on its massive debt, estimated at over 180% of GDP this year. It’s also likely to leave economists scratching their heads, as the increases in taxes on consumption and on corporate profits proposed Monday go against the broadly-accepted logic that Greece can’t save itself by squeezing any more in taxes out of its battered population and businesses.

At a press conference after the talks, German Chancellor Angela Merkel played down any suggestion of agreeing debt relief now, saying it had been dealt with in Greece’s 2012 bailout and “is therefore not the most acute question currently.”

Merkel, viewed by many as the key voice among the creditors, said that what Greece had proposed represented “a certain degree of progress,” but said the discussions “had made clear how much work still had to be done.” She also said there was no chance of agreeing new loans until Greece had complied with the current bailout in full, and that its compliance had been verified by the IMF.

While leaders debated in Brussels, the situation back in Greece remained tense Monday, with large demonstrations both in favor of the government, and in favor of keeping the euro at (implicitly) all costs.

With the situation still on a knife-edge, deposits continued to flow out of Greece’s banks Monday, according to anecdotal reports, albeit without any obvious signs of panic. The European Central Bank had agreed before the summit to raise the ceiling on its emergency short-term loans to the Greek financial system, but its governing council will hold another teleconference call again Tuesday morning before deciding whether to impose any controls on the banks in its capacity as their supervisor. News agencies reported Greek officials as saying that the ECB would continue to support the banks as long as Greece remains formally in an adjustment program.

At the moment, that means for another week. European Commissioner Jean-Claude Juncker said after the summit he’s “convinced we will complete the process this week.” It should be clear by the small hours of Friday morning whether that confidence is justified.