Last week ended with an agreement between Greece and Germany over the way forward in dealing with the Greek debt situation. Like most European deals , it was a fudge arrangement where both sides went in saying one thing and came out claiming victory having said another. The Greek government claimed to want to tear up the existing arrangement and negotiate a new one while the German government claimed that nothing could change. In the end, they agreed to a four-month extension of the current accommodation if Greece can come up with some financial ideas that the rest of the eurozone can approve. This was a political settlement, and economics had little to do with it. The euro has always been about politics.
The abyss beckons if the Europeans don’t make a deal. Greece will run out of money in a matter of days if certain sources are correct. If this happens, banks across Europe are going to suffer, and the IMF, European Central Bank and Brussels will take a hit as well. Greece, having suffered 7 years of recession, will not recover from hitting bottom any time soon. In other words, it is in no one’s interests for this to happen. Only the neo-liberal ideologues who have no skin in the game argue that a Greek exit from the eurozone is the only solution.
Estimates are that Germany, for instance, stands to lose 77 billion euro if Greece doesn’t pay up. While it is an amount Germany can handle, it is still significant. However, if Greece does not stay in the eurozone, the entire idea of a single currency becomes reversible. Reversibility is the one thing that the European Project has opposed since the founding of the European Coal and Steel Community a life time ago. Ever closer ties to prevent the kind of war that was endemic in Europe for centuries has been the goal.
What has changed with the Syriza Party coming to power in Greece is the realization on the part of the debtor that payments or the lack thereof provide Athens with leverage. The lending states of the EU are finally learning that it is just as bad to be an irresponsible lender as it is to be an irresponsible borrower.
The European Union should adopt the fig leaf as its symbol because everyone in this deal is covering up something. Syriza is not changing very much about the structure of the debt deal. It is buying itself some time right now. If it uses its time better than previous Greek governments, everyone will benefit. If not, kicking the can down the road is hardly the end of the world. Meanwhile, Germany’s insistence on austerity has run its course. Cutting government spending when private spending dries up is plain stupid. Germany has admitted that Greece must be allowed to find its own way forward, and so has agreed to let Athens draw up a list of reforms rather than dictating what the reforms will be.
The problem for Germany is that Greece has basically run out of patience. The debt-to-GDP ratio has soared despite the austerity program because of simple arithmetic; the GDP has dropped 25%, and the debt has not fallen as much as quickly. So, by that measure, things have grown worse. If suffering for seven years hasn’t worked, why would one opt for an eighth year of misery?
Greece is supposed to offer its list of reforms this afternoon. The creditors will likely approve it. And even if they don’t, the deal is arranged in such a way that Athens need only provide a new list. Politically, Greece cannot leave the eurozone, and politics always trumps economics. It will be messy and ugly, but there will be a deal.