Greece's last-minute agreement with the Eurogroup on Febuary 20 averted a potential major financial disaster. The Greek government was days from running out of money to pay the bills. But despite the claims of victory by both Prime Minister Alexis Tsipras and his European creditors, little has changed in the relationship among Europe, the International Monetary Fund (IMF), and Greece, as I expected [also in Spanish]. Paraphrasing the Sicilian novelist Giuseppe Tomasi di Lampedusa, change has occurred in Greece, so that nothing (or little) changes.
The deal was similar to what Greece would have obtained with the previous government. Any potential change will come in how Tsipras's government implements it. Given the agreed fiscal targets, will the composition of expenditures and revenues, or the type of reforms, be adjusted? Given the left-wing political leanings of Tsipras's Syriza coalition, one would expect some different priorities. There is always flexibility within a fiscal policy path and a reform objective, and that flexibility is dictated by domestic choices.
Greece has no market access, is facing a sharp liquidity crunch, and needs external funding. It remains under the monitoring of the IMF, the European Commission, and the European Central Bank (ECB)—a group formerly known as the "Troika," now to be called the "institutions" as a gesture to Greece's sensibilities. The agreement of late February calls for a four-month extension of the current program, which may be granted based on proposals that Athens is to submit by the end of the month. No new funding has been agreed, leaving Greece's acute liquidity crunch unresolved. A possible solution (including the ECB's reinstatement of the waiver to accept Greek government bonds as collateral) could be adopted if the Greek proposals are submitted and accepted by the Eurogroup.
Once the four-month extension is granted, Greece will have to deliver on its proposals to pass the currently incomplete program review by the end of April. That delivery would unlock the pending €7.2 billion from the current review and the transfer of the 2014 profits from the ECB purchases of Greek bonds under the securities market program (SMP). This timetable adds up to a two-month grace period for Greece to legislate the measures needed to complete the review. Two more months will then be available to negotiate a new four-year program by the end of June, now to be named a "contract," so that Greece can meet the heavy financial obligations it is scheduled to face in July.
Yes, the fiscal targets will be renegotiated. But such a renegotiation always occurs when circumstances change—in this case, because the Greek economy has collapsed since the elections were called last autumn. There was an important display of lack of confidence by the Eurogroup, in that it decided that the €10.9 billion of Hellenic Financial Stability Fund (HFSF), previously jointly managed by the Greek government and the European Financial Stability Fund (EFSF), will now be managed only by the EFSF. The Greek demands to use these funds as an alternative to a program have backfired.
The semantic victory of being ruled not by the Troika but by the "institutions" under a "contract" and not a program came with a price: two lost quarters of GDP growth, billions of deposits fleeing the banking sector, and a loss of face to Europe. The need for Tsipras's government to change the composition and not the size of the program, seeking to reduce income inequality and tax evasion while breaking down the oligopolies and interests groups (including the Orthodox Church) that grip the Greek economy, means that change must happen at home, not in Europe.
The negotiation was never about the economics. Greece surely needs a more balanced policy mix of growth boosting demand stimulus and potential growth enhancing reforms. Europe should want the same thing. Further debt relief, as requested by Athens, does not need to be tackled now. Europe can respond to Greece's actions by supporting growth as part of its quantitative easing (QE) measures. The negotiation was about the politics, and the two sides came to the bargaining with very different needs. Syriza wanted to fulfill its antisystem campaign promises. The Eurogroup had to defeat those promises, not just to preserve the political integrity of the European Union but to minimize political contagion and send a warning signal to dissidents in Germany, Spain, and Portugal. Tsipras had to put up a fight for his voters, but European leaders had no latitude to make concessions. The abrasive style of Tsipras and his colleagues, who looked like they were demanding rather than negotiating, only reinforced European intransigence.
Now Europe has reinforced the message that the rules must be followed by anyone wanting to be part of its club. Thus the insistence that Greece stand by the commitments of the previous government and that any solution has to conform to the system.
When Finance Minister Yanis Varoufakis tried to enlist the help of Anglo-Saxon euro-skeptic academics, leak confidential documents, and break many unwritten rules in economic diplomacy, he failed to understand that this was a matter of politics, not economics. Indeed, according to press reports, he did not participate in the final negotiations.
Judging by the speed in which they pulled deposits from banks, the Greek people do not trust the government they have elected to effect the change they seek. The campaign is over. Now it is time to govern. Governments must operate inside the system. In the last three weeks the Greek government has wasted a tremendous amount of political capital. What Greece needs, above all, is political stability and assurances about its future inside the euro area. It is high time for the Greek government to get to work with its European counterparts and build the foundations of a competitive economy and a more equal society inside the euro area.