A deal for Greece that is savage but outcome was necessary for Europe in throes of a profound crisis

An inclusive euro zone should be able to write down debts and fund fiscal transfers between stronger and weaker members if it is to survive as a mutually-beneficial system

 

Greece’s prime minister Alexis Tsipras correctly describes the alternatives facing Greece as between the bad choice of a stringent economic and debt consolidation programme and the catastrophic one of being forced out of the euro zone. In choosing the former he has accepted a political defeat on his anti-austerity platform to avoid the chaos of default and economic collapse outside the euro, for which he has no mandate nor most Greeks any desire. It is a savage outcome, but an outcome was necessary to this profound crisis. Assuming the agreement is implemented Greece can benefit over the medium term if certain major lessons are learned.

The Syriza party was elected last January on a programme opposing the imposition of further austerity on an economy already in deep recession and pledged to find alternatives. It made a good macroeconomic case against this policy approach; but failed to offer credible alternatives for reform and growth and rapidly lost the trust of EU partners because of its negotiating approach and style. These failings deprived it of allies among other EU governments, even while it sought support from their left-wing opponents. Unsurprisingly, this antagonised its partners even further, notably after the referendum was called. The fallout has made this agreement more severe. Potentially, it threatens the solidarity on which the EU’s monetary and economic union must rest.

Bargaining to stay in the euro zone against this background put Greece in a much weakened position. To avoid exit it must now implement immediate changes in its VAT system, pensions, statistical services and civil legal code and then tackle specific product markets, energy and labour markets, clientelism in its financial sector, take concrete steps to depoliticise its civil service and extensive privatisations. The prospective new programme from the European Stability Mechanism would put Greece into its third debt bailout in five years, adding €82-86 billion to its existing €232 billion debts over the next three years. Such debt levels are unsustainable for such a weak economy. Euro zone leaders, led by Germany, have mistakenly refused to consider haircuts but only extended loans. They now insist on a special co-managed fund of €50 billion to repay and refund banks and organise investment. A €35 billion investment fund is also proposed.

Germany and it allies must eventually accept that an inclusive euro zone should be able to write down debts and fund fiscal transfers between stronger and weaker members if it is to survive as a mutually-beneficial system. This crisis should open up that debate on the euro zone’s future after it just about held together on this occasion. Without a commensurate debate on restoring political trust and solidarity, economic and monetary union will not be sustainable.

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