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A Greek Deal and What It Means



Greece and the Eurogroup have struck a deal designed to avoid another economic meltdown and even return Greece to economic growth. An additional four months have been added to an earlier two-month extension of the review of Greece's economic reform program, giving Athens and its partners until the end of June to reach a more comprehensive arrangement. As previously discussed, the threat of an acute fiscal revenue crunch and an accelerating deposit flight from the banking system gave the new Greek government no choice but to reverse course and seek such an extension while remaining committed to the goal of reform.

Indeed the new list of Greek reform commitments includes most of the agenda in the existing program imposed by the Troika, consisting of the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF). Both the IMF and the ECB will not accept vague "policy commitments" from Athens but instead will demand concrete reform implementation before releasing further funds to the new government.

Despite the predictable spin, this outcome represents a Greek government capitulation—and a likely worse outcome for the Syriza coalition in Athens than what might have resulted from a more levelheaded and credible negotiating strategy.

Prime Minister Alexis Tsipras won some rhetorical points. Athens now deals with "the institutions" rather than the hated Troika. It must adhere to an "agreement" rather than "the program" demanded by its creditors. Greece also has a new, more formalized ability to propose alternative economic reforms rather than the ones imposed before. But these were changes in form, not substance. Anything that Athens proposes must still win the approval of creditors before any payments are made. Greece thus remains as dependent as ever on the euro area and the IMF. Its financing needs have been left vague, allowing the euro area to maintain maximum pressure between now and the end of June.

On substance, Tsipras and his loose-lipped finance minister, Yanis Varoufakis, now face the same situation that former Prime Minister Antonis Samaras faced in late 2014, in the process reaffirming the principle that the voters in one member state are not eligible to demand special considerations from the voters in other member states that are providing the financing for Greece's lifelines. Those needing financial assistance cannot dictate terms to those providing the assistance. Also affirmed is the principle of taxation and democratic representation in the euro area, which is good news for the common currency.

How did Tsipras get into this box? Inexperience and excessive populist panache might be expected from officials in power for the first time. But the diplomacy of the new Syriza-led government has left Athens worse off than before. For example, there is no reason other than the lack of trust and irritation among the other euro area governments for the Hellenic Financial Stability Fund (HFSF), which was set up to carry out banking recapitalization, to be removed from joint Greek-creditor control and placed under the European Financial Stability Facility, answerable only to the ECB and the Single Supervisory Mechanism (SSM).1 This move was proof that Varoufakis's blogging-style preaching to his fellow euro area finance ministers achieved nothing but a hardened attitude among European creditors answerable to their own taxpayers. He failed to understand that Greece's moralistic tone would not persuade Berlin or the rest of the euro area. Some self-reflection is in order for Athens and the Anglo-Saxon commentariat and anti-German editorial writers, who transplanted their home-grown ideologies to Athens, urging it into its ill-fated anti-austerity Charge of the Light Brigade.

On the other hand, was there a method to Tsipras's self-defeating madness? Perhaps all the Greek people wanted when they elected him was a new rhetorical wrapping on the same old reform package. Even in 2014, polls indicated Greeks believed that European institutions were better equipped to act [pdf] against financial crisis than the successive governments in Athens. Perhaps Greek voters understood that austerity and reforms were inevitable but only wanted to reward the political actor best able to employ theatrics and rhetorical excess to assuage their downtrodden dignity. If Tsipras survives his policy U-turns, he can claim to have performed a masterful political ploy of aggravating relations with his European partners but earning his voters' gratitude while moving to the political center—a process that would benefit both himself and the euro area.

Greece is now effectively in its third bailout program since 2010. As previously discussed, a new program would include consolidation of official sector debt into only very long-dated and concessionary euro area loans (IMF and ECB debt paid out by the Eurogroup), a slightly easier short-term fiscal target (which has been politically agreed already), a rhetorical change of the relationship between Greece and its creditors (which has occurred) and full commitment by Greece to continuing reform (which also has occurred).

Tsipras faces some hard policy implementation choices. The "institutions"—as the IMF, ECB, and European Commission are now called—will want to ensure its compliance with new reform commitments before the new June deadline. The somewhat looser fiscal target (i.e., a lower primary surplus requirement) does not portend relaxation of Greece's commitment to tight fiscal policy, but it does recognize that Greece's chaotic political and economic situation in recent months has reduced government revenues, making existing targets unachievable. The irony, of course, is that Tsipras's theatrics have achieved one of his election campaign goals of easier budget constraints, but at the expense of a weaker Greek economy.

A lingering fear exists over Tsipras's ability to deliver a majority in the Greek parliament for his new (i.e., old Troika) economic policies. One can easily imagine the left-wing of Syriza rebelling, just as the restive left-wing of France's Socialist Party has done. But Tsipras could be rescued by a grand coalition of parties securing a majority for his program, which could never happen in politically ossified France because of the presidential ambitions of opposition party leaders.

Syriza could lose more than a quarter of its members and still survive with the potential support of the centrist party To Potami and PASOK, which together have 30 members in the new parliament. Even the former incumbent party New Democracy (ND) is likely to support the new government to appear responsible to Greece's European partners2 and force Syriza to take responsibility for the new reforms the new government must now enact—and in hopes of returning to power in the future. ND (76 members of parliament) parliamentary support would see a de facto grand coalition emerge in Greek politics, enabling Tsipras to disregard his left-wing. In this likely scenario, Greek politics would suddenly resemble the grand coalition politics elsewhere in the euro area. The Greek government does have some room to adjust its program commitments, primarily by pursuing new revenues from a concerted crackdown on tax evasion and corruption. If the crackdown succeeds, the government can use the money for its social policy priorities in a de facto pay-as-you-go spending system for Greece. But given Greece's unfortunate history of budget fraud, Syriza will have to prove to its creditors that the new revenue is there before new spending is allowed. For now, Greek drama has yielded to the realities of Europe.


1. The linking of the HFSF to an ECB/SSM request makes it, in light of these institutions' narrow focus on bank solvency, considerably harder for the Greek government to gain access to these funds for other purposes. Any new funds for Greece will therefore now have to go through the full approval procedure in the euro area.

2. Many in Europe will remember how Samaras in 2011 undercut the prior Papandreou government in order to become prime minister himself. New Democracy would be ill advised to repeat such tactics in the future.

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