After an exhausting weekend of overnight talks the Eurozone finally reached an agreement over the way forward for Greece. This means that Greece will remain part of the Eurozone (for now), and a bridge-financing agreement is in place to sustain the banks until around €85 billion in new bailout funds are given in exchange for reforms over the next three years. Measures in this agreement include further austerity such as rises in VAT and pension reform, but also structural reforms such as a tax authority and reforms in the public administration system. Additionally, the agreement instructs the creation of a privatisation fund that will manage €50 billion worth of assets – to be based in Athens and headed by technocrats.
While this is good news given the situation and the realities that both sides faced, it remains the better of two very, very bad scenarios, both for Greece and the Eurozone. The fact that both sides allowed things to escalate to this point is something that has caused irreparable damage to the Eurozone project and that will haunt the currency union for years. After over six months of intense brinkmanship during which Greece’s government lost Europe’s trust, Germany is now losing this trust too. Its approach of offering Greece an unfortunate ultimatum of full submission or complete destruction may make sense from a game theory perspective, if one believes the consensus assessment that the unknown consequences of a Grexit are to be feared by Greece more than the rest of the Eurozone. But it is terribly insufficient and undermines Germany’s capacity as a leader in this imperfect union.
Shifting attention to the immediate future, despite this morning’s euphoria it is still too early to pop the champagne just yet. The measures proposed will need to be passed in the Greek parliament by Wednesday. While Tsipras enjoys strong political capital after the confidence afforded to him through the referendum, the latest measures are bound to hopelessly divide his own party even further. There will be support from the opposition, but this only adds to the uncertainty: it is important not only to manage to pass the reforms, but also to have someone to implement them. Public support for the other mainstream political parties remains very low, and a government of national unity headed by technocrats is bound to widen the democratic deficit of the Eurozone exposed through the current Greek crisis yet further.
Further, there remains the issue of the banking sector. While a bridging agreement has been reached, the banks have suffered severe losses over the past few weeks. The European Central Bank meets later today – it remains to be seen whether it will take bold action and increase the Emergency Liquidity Assistance (ELA) cap, or whether it will hold it steady until reforms are passed in the Greek parliament.We judge that a decision to raise the ELA ceiling is most likely to come after the Greek parliament has debated the reforms later this week.
In conclusion, behind the Eurozone’s rush to proclaim this deal as a success lies the harsh truth that months of brinkmanship have finally taken us to an unwanted quadrant of a very complicated ‘game’, with all actors worse off: The Greek government will be judged harshly on its record and legacy. It has consumed all its political capital from the January 2015 election to take negotiations to the brink, with a complete disregard of how the real economy performed in the meantime. The deal struck today remains very far off from the party’s original mandate and aims, raising the question of whether all this fuss has been worth it. The hardline Eurozone camp will also bear an ugly legacy after choosing to utilise its negotiating advantage to take Greece to the brink rather than offer a pro-growth, pro-unity compromise. Initial suggestions for a ‘temporary’ Grexit or creation of a privatisation fund based in Luxembourg were received as a complete PR disaster, culminating with just under 400,000 tweets containing the hashtag of #thisisacoup in response. Finally, the IMF remains in a position with damaged credibility, having just agreed to a programme that lacks firm restructuring commitments – only days after making this its main negotiating platform for further involvement in Greece.
Danae Kyriakopoulou
Senior Economist
(This is an excerpt from Cebr’s The Prospect Service)