The compromise on the Greek economic situation solved nothing. It was just a way of buying time before the next official rounds of negotiations start later in March and reach their climax in the summer. Financial markets have reacted very calmly, as if the Greek saga were not such a big problem. Yet, the general context has changed. The Greeks have lost face and its government appears weaker, but Germany has emerged as the only real counterpart for troubled countries within the EU and the eurozone in particular. Eurozone countries in trouble in the future will be heavily dependent on solutions from Germany.
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.
But things are probably more complex and the scenarios which could open up in the next few months are not obvious.
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 significant capital outflows with some 25 billion euros leaving Greece during the previous three months, and by the Greek population refusing to pay their taxes in the hope that there would be a generous tax amnesty when austerity measures were ended.
Greece needed both a short-run and a long-term solution.
The temporary solution, in theory, would have consisted of accessing the 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 yet been used. In practice, access was conditional on Greece having cut public spending and privatised/liberalised large areas of its economy. Greece had failed to satisfy those conditions.
The long-term solution, envisaged by the Greek leaders, was an increase in public spending to trigger growth.
A vaguely worded compromise was reached in the end. In the short-run, the Greek government may be allowed to tap the bailout funds in exchange for a credible plan to overhaul its economy – a plan which must still be presented and approved – while the Greek long-term proposals were simply 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, despite having persuaded public opinion it had not conceded to Greek demands, staged no impressive or dramatic performance.
First, because the EU authorities ended up accepting an extension of the bailout programme although Greece had no right to it.
Second, because it was apparent that the EU was unprepared to manage a possible Greek exit from the euro and a return to the drachma.
Third, because Brussels seemed unable to develop a long-term vision and acknowledge that the Greek government is insolvent and reconsider the role of the EU institutions – including the European Central Bank – in times of crisis.
The scenarios over the next few months are little clearer than they were at the beginning of February.
Need for cash
The Greek leaders have lost some popular support, but this does not mean that the EU institutions have enhanced their status. The inconclusive stand-off between the EU and Greece has created a number of losers and no clear winners. This will have consequences.
The first consequence is that the February compromise has bought four or five weeks extra time but produced no solutions. The Greeks will need at least 30 billion euros and some say more likely up to 50 billion euros next summer, both to repay a fraction of its debt and to finance the budget deficit.
Where will the money come from? Does the troika really believe Athens will retrieve all those billions during the next four months by fighting corruption and tax evasion, and ‘rationalising’ public spending?
These illusions and, more generally, the lack of credible direction are harbingers of future uncertainty. In this perspective, we examine three different contexts – financial markets, European institutions, and national governments.
Financial markets have shown surprising calm and optimism. Despite much talk of volatility, European stock markets have been rising during the past eight weeks, regardless of what was happening to 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 emerges again.
Large quantities of Greek treasury bills have already moved from commercial banks to the ECB, so that an eventual partial default on the Greek public debt will be perceived as a relatively remote EU problem rather than the price private investors should pay for having financed a bad debtor.
These recent negotiations have confirmed a number of features which are likely to become permanent for the European institutions. One is 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.
European MPs in particular seemed happy to let other actors take centre stage, and de facto abdicated their power and duty to monitor the Commission’s activities.
This is not very comforting for those who had believed that a more energetic European parliament, after the Lisbon treaty, could be the key to developing the feeling of popular legitimacy which the EU badly needs.
The silence of the eurosceptic parties sitting in Strasbourg is also telling. Are they silent because they want to delegitimise their own institution, or because – and rather more likely and consistent with what we anticipated almost a year ago – they all have different views about euroscepticism and therefore fail to articulate a common view which makes an impact?
Balance of power
This round of Greek negotiations has 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.
This absolute failure, rather than the vague promises he made to buy time in February, is the grand lesson to be drawn from the past years in general, and from the last weeks in particular.
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.
If that is true, one will have to look at German politics – including the sentiments of political leaders, big business and public opinion at large – to understand what is likely to happen next.
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.
If that is so, Greece could serve as an example for the future.
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