Europe Letter: Second bailout will not end Greek drama

It is somewhat ironic that this week’s scheduled summit of European Union’s leaders was expected to deal with the bloc’s grand plan to deepen economic and monetary union.

While the so-called Five Presidents' report will be presented at the opening of the two-day summit which begins this afternoon in Brussels, European Commission president Jean-Claude Juncker's pronouncement this week as he launched the report that the euro currency was "something to be proud of . . . something that protects Europe" seems pitifully inapt. Once again an EU summit is being headlined by Greece.

Almost six years on from its first bailout the euro zone’s most indebted country is struggling to avert default.

Third bailout inevitable

Many in Brussels are calling for a decision to be made this week that settles the Greek issue once and for all. Even if a bailout agreement is reached, a third Greek bailout is inevitable. Weeks and months of further tortuous discussion on the terms and targets of a further package await, a prospect that will almost certainly intensify the bitterness and divisions gnawing away at the fabric of the euro-zone union.

But while the Greek crisis has exposed the single-currency project’s inherent flaws, the fault lies not only on the EU side.

Unlike in Ireland, where the International Monetary Fund was curiously feted by many as some form of saviour during the Irish bailout, it is the Washington-based fund, not the commission, that is demanding some of the toughest measures from Greece in the current phase of negotiations.

The IMF is unhappy with the balance between spending cuts and tax rises in the latest Greek proposal – most of the proposed savings contained in the latest Greek plan would derive from extra taxes. In particular the IMF is concerned that the Greek proposals on pension reform do not go far enough, particularly the plan to make up much of the shortfall by increasing employee contributions rather than cut pensions.

True, the IMF has consistently argued EU lenders should consider further debt relief for Greece, but arguably that is because it is euro zone member states who stand to lose the most financially should Greece default, not the IMF.

While Greek prime minister Alexis Tsipras’s criticism of the IMF yesterday could be seen as an attempt by Syriza to divide its enemies, his claims have some substance.

In truth, the IMF has always been uncomfortable with its participation in the bailouts of euro-zone countries. Under pressure from its members from emerging countries, it is loath to break its rules to save a euro zone member.

The move by Greece to rebundle its June repayments, though technically permissible, was undoubtedly provocative as indicated by the fund’s decision to recall its representatives from Brussels earlier this month.

Questions for the EU

Nonetheless, the continuing Greek crisis also opens up serious questions for the EU and the single currency.

While Frankfurt is playing a key role in the Greek crisis, by keeping the Greek banks afloat, it is evident that European Central Bank president Mario Draghi is anxious for politicians to take the difficult political decisions on whether to keep Greece within the euro area. Euro- zone finance ministers and leaders are facing a moment of truth about how far they are prepared to go to keep Greece within the fold.

Minister for Finance Michael Noonan is not alone in his hardline approach to Greece. At Monday's summit, Luxembourg's prime minister Xavier Bettel said that while a Greek exit from the EU would be a "lose-lose situation", he also had responsibilities towards his taxpayers. "To say that there is no debt and we should forget the debt is not a solution."

Greece is likely to face a tough battle to convince the other 18 members of the euro area to countenance debt relief. Not least, a pledge to write off debt would reignite calls for debt relief for Ireland, while it would also prove difficult to sell to Germany and other large creditor countries.

Whatever the outcome this week, the biggest loser of the latest Greek standoff may be the euro project. The bitterness and recriminations that have characterised the last five months of discussions have inflicted irrevocable damage on the idea of solidarity and cohesion that underpinned the idea of a currency union when it was launched with such fanfare 15 years ago.

At a time of increasing Euroscepticism across the bloc, the sorry tale of the Greek debt crisis will do nothing to improve the EU’s image in the public eye.