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What’s the point of a Greek deal no-one believes in?

Euclid Tsakalotos, Greece's finance minister, pauses while attending a parliamentary meeting in Athens, Greece, on Wednesday, July 15, 2015. Parliament will vote Wednesday night on the measures Greece's creditors demanded as a condition for aid as capital controls ravage an economy that has already shrunk by a quarter since 2009. Photographer: Kostas Tsironis/Bloomberg *** Local Caption *** Euclid TsakalotosEuclid Tsakalotos, Greece's finance minister, pauses while attending a parliamentary meeting in Athens, Greece, on Wednesday, July 15, 2015. Parliament will vote Wednesday night on the measures Greece's creditors demanded as a condition for aid as capital controls ravage an economy that has already shrunk by a quarter since 2009. Photographer: Kostas Tsironis/Bloomberg *** Local Caption *** Euclid Tsakalotos
Euclid Tsakalotos, Greece's new finance minister, defends adopting a package of measures his party hatesPhotograph by Kostas Tsironis — Bloomberg via Getty Images

What is an agreement worth if none of the parties believes in it?

Greece’s Prime Minister Alexis Tsipras has told Greek TV the deal he signed on Monday “is one that I don’t believe in, but that I am obliged to accept.”

The International Monetary Fund says that “Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far.”

Germany’s Finance Minister, Wolfgang Schäuble, said he agreed with the IMF, and that several people in the German government thought it better if Greece leaves Europe’s monetary union “temporarily.”

Far from taking ‘ownership’ of the aid-for-reform plan that Eurogroup chairman Jeroen Dijsselbloem says is essential for success, it looks to all intents and purposes like a newborn abandoned, like Oedipus, on a hillside.

In Greece, parliament will pass the austerity measures tonight, and the ruling Syriza party will split. According to Stathis Souvelakis, a senior party figure, over half of Syriza’s 201-strong central committee rejected the agreement at a meeting Tuesday night. Up to 40 of Syriza’s 149 deputies are expected to rebel against the government tonight (although so far only one–deputy finance minister Nandia Valavani–feels strongly enough about it to resign her government privileges).

That will leave the country without a stable parliamentary majority, albeit one that can pass individual votes on an ad hoc basis with the support of the opposition. If the mainstream parties that support the agreement are as good as their word, and refuse to join a formal government led by Syriza, then elections must surely follow soon. Common sense suggests that, given the level of public anger at the way things have turned out this year, support for extremists such as the Neo-Nazi Golden Dawn will rise, and the soi-disant “national unity government” that follows will struggle to be worthy of the name.

Even if it holds together, the new government’s implementation of yet more austerity under the beady eye of foreign technocrats will carry a high risk of pushing even more Greeks into extreme fringe movements. And at the heart of the program is the palpably absurd notion of privatizing €50 billion worth of Greek assets (the IMF said recently it couldn’t trust Greece to realize more than €500 million a year).

It all looks like a recipe for failure, unless the Eurozone gets real about relieving Greece’s debt, which will rise to €400 billion if all the monies envisaged in the third bailout package are spent. (Greece has a workforce of just under 5 million people: it might take them a while to work that off.).

To be fair, there are signs that the Eurozone’s politicians are starting to contemplate the previously unmentionable. France’s Minister Manuel Valls told lawmakers in Paris that the debt would be “reprofiled”. However, even pushing back repayment schedules by 30 years would only take cut Greece’s debt-to-GDP ratio by some 28 percentage points, according to this research by Royal Bank of Scotland’s Alberto Gallo:

The only debt 'relief' worth mentioning will come with writing down principal, or extending for a generation or more.
The only debt ‘relief’ worth mentioning will come with writing down principal, or extending for a generation or more.

 

Another positive thing to note is that the wheels are now in motion to re-open Greece’s banks, even if they look set to stay closed to the end of this week. The European Union (not the Eurozone, mind) is to lend €7 billion a three-month “bridge financing” to help Greece clear its arrears to the IMF and meet a €3.5 billion bond redemption to the ECB on Monday. Assuming that goes through (over British and Czech objections), the ECB will be able–by its own subjectively interpreted rules–to offer more liquidity support to the banking system (as long as it is recapitalized with between €10-€25 billion more in bailout funds).

If €12 billion in bridge finance (it will need another €5 billion in August, according to the Eurozone) only leads to a new bailout agreement based on austerity, then it will be, as Gallo notes, a bridge to nowhere. The only hope is that the three months bought by Monday’s deal will be a bridge to a change in thinking in Germany which, according to Yale School of Management Professor David Bach, has become a prisoner of its own misleading narrative of the crisis, a narrative of hardworking, thrifty Germans duped by lazy and scheming southerners illustrated with alarming clarity in the New York Times today by Jacob Soll.

German Chancellor Angela Merkel “hasn’t been honest with people in Germany about how we got to this point, and that limits her options,” says Bach.

Paradoxically, last weekend’s near-miss may have made it easier for Merkel and the rest of Germany’s political leadership to turn public opinion around. Like the Chancellor herself, the German electorate habitually shies away from truly radical actions, especially if they invite accusations of ambitions to dominate Europe. And as this poll shows, the closer the reality of turbulent ‘Grexit’ scenario came, the less Germans liked the look of it.

As the reality of a "Grexit" rose, Germans suddenly became more cautious about the idea.
As the risk of a “Grexit” rose, Germans became more cautious about the idea. Source: YouGov
Source: YouGov

 

Still, after the events of the weekend, only the bravest optimist would dare to predict a happy ending in October, when we will have to face the freshly-kicked can once again.

CORRECTION: The original version of this story incorrectly stated Prof. Bach’s employer as Yale University. The article has now been corrected.