First published: 13th July 2015
This is a slightly longer post than one I wrote for Prospect magazine’s website. Just for the record, I support the idea of the Euro, even a flawed Euro, as an integrating force in Europe. I take no comfort from this past weekend’s shenanigans in which the German Finance Ministry proposed for the first time a mechanism for turfing a member country out of the Euro, or the consequences this has had on European relations and the future of the Euro. It was a shocking idea, and may have changed the way we think about the Euro project.
But I don’t go along either with the virulent and populist rants of Europhobes, who have been itching for a time when disintegration would happen, but who nevertheless rail against Germany and others for raising the prospect, and shed crocodile tears for Greece. Ignorant of the country’s near 200-year quest for European identity, they urge Greece to leave the Euro and subject its citizens to an even more desperate existence as an independent, but most likely weak or failing Balkan state. Such hypocrisy.
I do worry though that Europe may now feud, and degenerate along the lines outlined by Wolfgang Munchau here http://www.ft.com/cms/s/0/e38a452e-26f2-11e5-bd83-71cb60e8f08c.html#axzz3fl5KRomu . He says that Greece’s creditors
‘… have destroyed the eurozone as we know it and demolished the idea of a monetary union as a step towards a democratic political union. In doing so they reverted to the nationalist European power struggles of the 19th and early 20th century. They demoted the eurozone into a toxic fixed exchange-rate system, with a shared single currency, run in the interests of Germany…’.
He may well be right. This could be the opening act of disintegration. It could just be one of the many phases Europe has been through since the Middle Ages in which attempts to unify Europe have waxed, and then when waning, reverted to a realpolitik in which Germany or its geographic antecedents have been centre-stage. In that sense, the European dream would be over, and a sort of Teutonic monetary union might prevail. But nothing is pre-ordained yet.
Where we are
Jean-Claude Juncker called it an Agreekment after marathon talks this past weekend. A template for a plan has been agreed. It has to be passed by the Greek Parliament by Wednesday. If it is, Angela Merkel will recommend it to the Bundestag for approval, and five other national legislatures must do so too. At that point, the negotiations for a €82-86 billion financial programme from the European Stability Mechanism (Europe’s €500 billion bail-out fund) will begin. During the next days, moreover, Greece will need bridging loans of up to €7 billion to cover debt repayments to the IMF and ECB, and a rise in the so-called Emergency Liquidity Assistance extended by the ECB – a credit line currently standing at €89 billion – to Greek banks so that they can re-open, though it will take time before normal services are resumed.
The details of the deal are still emerging after acrimonious exchanges from Brussels to blogs and social media. Summarising, Greece has had to climb down on almost every issue, including the demand for debt relief, where the agreement says only that upon the first review of the new loan agreement, longer grace periods and maturities may be granted. Greece has agreed to implement changes to its tax and pension systems, which have been the subject of discussion for months, and to which the government agreed in proposals last Thursday. It has also acknowledged that it has to pass reform legislation spanning public administration, product market and labour market liberalisation, and the opening up of closed professions, and to reverse ‘end-of-austerity’ policy changes introduced earlier in violation of the previous loan programme.
Perhaps most sensitive of all, it has to accept the return of Troika monitoring staff to Athens (probably not the most desirable job in the world right now), the involvement of the IMF in the new programme, and the establishment of a €50 billion fund of assets. Once privatised, half of the assets are earmarked to pay for the urgent recapitalisation of Greek banks, a quarter to repay debt, and a quarter to finance investment.
In the original German Finance Ministry proposal, the fund was to be set up in Luxembourg, but this has now changed. That proposal also contained a ‘dynamite’ proposal, also now dropped (from the agreement at least) that if Greece were unwilling or unable to agree to a deal this weekend, it should be offered a 5 year ‘time-out’ from the Eurozone, during which time its debt might be restructured. In other words, a temporary exit.
What were they thinking about?
The logic behind this is still not clear. If Greece were successful outside the Euro, with a mega-devaluation and its debt ‘zeroed’, it wouldn’t need to re-enter. It it were not, then it wouldn’t be re-admitted. Either way, the single currency would have been buried and become a fixed but breakable currency arrangement. If the idea was to have Plan B, it was sufficiently ham-fisted to transform the Greek crisis into a full-on existential Euro crisis.
It split the 19 countries into three groups: Germany, the Netherlands, and eastern European countries which took the hard line, France and Italy and some others which wanted no part of it, and the rest in between. While all of this was going on, the Finnish delegation said it might not be able to support any ESM loan programme, because the True Finns party supporting the Helsinki government might bring it down. And earlier today, the Dutch Prime Minister said he would have to break an election promise by voting to grant Greece further assistance.
Two things we can say
So where does this leave things, other than still murky and prone to upset? Many things can still go wrong, but there are two things at least we can conclude.
There is consensus that Greece has gone through 5 months of totally avoidable economic pain and dysfunction, and that, as a result, the Greek proposals tabled last week did not go far enough to rebuild confidence in the prospects for Greek growth, competitiveness, fiscal balance, and modern public administration. It will be bitter pill for Alexis Tsipras to swallow the AGreekment, and sell it to the Parliament and to the OXI (No) voters he stirred up in last week’s referendum. He may succeed in the former with opposition votes, but Syriza may split, and a new coalition may have to be formed. The reaction of citizens is unpredictable.
Tsipras remains very popular and we shall soon see if he is an unreconstructed Marxist biding his time, or if he sees an opportunity now to tack away from the harder Left to make a real effort to drive economic and political reform, and introduce some of the key political changes proposed in the Thessaloniki programme on which Syriza came to power. This would of course be under the watchful eye of the dreaded Troika, but in the relative calm of a Europe, whose identity Greece craves, and which provides both financial and institutional support.
Set against this, no truer word has been spoken this weekend than when Angela Merkel said that the biggest thing Europe had lost was trust, which it was now urgent to rebuild. If it isn’t, and Greece rails against the terms of the AGreekment, the perception of lost fiscal sovereignty, and the uber-intrusion of member states, Greece’s exit from the Eurozone has only been postponed. Moreover, loss of trust is at risk of permeating Eurozone member states, themselves, notably Germany and France, whose different ideas about what the Eurozone should be and how it should function may be a sort of diplomatic ‘casus belli’. If so, the Eurozone’s internal recriminations could yet undermine the integrity of the entire project with unpredictable consequences.
At the 11th hour, Europe did pull back from the brink of losing Greece, but only for now. It’s a long way back.