Greek debt deal produces no long-term solutions

THE COMPROMISE on the Greek bailout programme was presented as a victory for the European hawks and a rout for Greek Prime Minister Alexis Tsipras and finance minister Yanis Varoufakis. The two over-confident Greek leaders have eaten humble pie, if success and defeat in February 2015 is judged according to what most media have reported, writes World Review expert Professor Enrico Colombatto. The deal was struck in February when the Greek government was running out of cash and had no emergency plans. It would have been impossible for Greece to finance government spending, including pensions and salaries, in March 2015. The shortage of money was aggravated by some 25 billion euros leaving Greece during the previous three months and the Greek population refusing to pay their taxes. Greece needed both a short-run and a long-term solution. The temporary solution, in theory, would have provided access to bailout funds which the so-called troika of the European Commission, the European Central Bank and the International Monetary Fund, had made available and had not been used. In practice, access was conditional on Greece cutting public spending and privatising large areas of its economy. Greece had done neither. Greek leaders wanted a long-term solution of increasing public spending to trigger growth. A vaguely worded compromise was reached where the Greek government, in the short run, may be allowed bailout funds in exchange for a credible plan to overhaul its economy - a plan which still has to be presented and approved. Greek long-term proposals were ignored. The Greeks lost face, since the European Union-led troika forced them to promise they would do what they had told the Greek public they would never do - accept troika oversight and launch serious economic reforms. The EU, persuaded public opinion it had not conceded to Greek demands, but it did not crow about victory because, first, EU authorities accepted providing a bailout extension when Greece had no right to one. Second, because it was apparent that the EU was unprepared to manage a possible Greek exit from the euro and third, Brussels seemed unable to develop a long-term vision acknowledging that the Greek government is insolvent. The inconclusive stand-off produced no solutions. The Greeks will need between 30 – 50 billion euros next summer to repay a fraction of their debt and finance its budget deficit. Does the troika believe Athens can find billions during the next four months by fighting corruption and tax evasion, and ‘rationalising’ public spending? Financial markets have shown surprising calm and optimism with European stock markets rising, regardless of events in Greece. The most likely explanation is that investors know that when Brussels is short of ideas, the European Commission turns to the ECB for easy monetary policy. Greece is too small to affect the European business cycle, and easy monetary policy is the most likely response when the Greek crisis re-emerges. The negotiations underlined the modest relevance of the European bodies. It was national politicians - especially from Germany - who drove the negotiations over Greece. The European Commission played a secondary role, while the EU council of ministers and parliament were virtually ignored. The negotiations also clarified the position of a number of eurozone countries which can be classified in three blocs - Germany, the weaklings, and the rest. Germany is in charge, the weaklings tread water and do their best not to antagonise the Germans, and the remaining countries hardly care. This is not entirely unexpected. Yet, it reflects that Mr Tsipras has not succeeded in galvanising enough consensus - not even among the eurosceptics and opponents of austerity - to change the balance of power within the eurozone club. It seems national governments are happy to follow vague European rhetoric and ideals when the economic situation is ordinary business, but rally behind Germany when trouble emerges. The Greek picture could take new turns before June 2015 if German intolerance towards the Greek insolent approach stiffens. Grexit - Greece leaving the eurozone - is all but inevitable. This is not necessarily bad news for the weaklings as a Grexit is unlikely to trigger an immediate domino effect. But both the EU and national authorities should waste no time and prepare for new policymaking contexts, in which the role of Germany strengthens and in which monetary leniency may continue, while the time of fiscal profligacy could come to an end. For a more in-depth look at this subject with scenarios looking to future outcomes, go to our sister site: Geopolitical Information Service. Sign in for 3 Free Reports or Subscribe.

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