Όλη η Ευρώπη βοά! What Are The Consequences Of the Greek Deal?

What Are The Consequences Of the Greek Deal?

by Henning Meyer on 13 July 2015 @hmeyeruk

Henning Meyer

There we have it. After a marathon session in Brussels last night there is a “deal” that is supposed to keep Greece in the Eurozone and set the country onto a path of sustainable economic recovery. You might well question the nature of this “deal” given that it turns a sovereign country effectively into a protectorate as at least one of the Eurozone leaders – Robert Fico – apparently admitted (see this from Twitter).

Make no mistake: the handling of the Greek crisis has fundamentally changed the European Union. This is not a situation in which we can just go back to business as usual – there has been way too much bad blood for this. So what are the consequences of the Greek “deal”? Here are my first thoughts:

• The recession in Greece is likely to continue. Alexis Tsipras has already admitted that the policy conditions he had to accept are recessionary and he hopes that a better climate for investment will help overcome this drag now that Grexit seems off the table. I can understand this hope and it would be great if it happened. Will it? I am not so sure…

• The timing of the referendum was indeed a big mistake. What did Tsipras gain? In the end he had to accept much worse conditions than were on offer in the framework of the second bailout package. This “deal” also settles for good the question of what prevails if push comes to shove – it is not national democracy but international creditors. There could well be reruns of this conflict if there is no credible Eurozone democracy in the future.

• Given the power structure of EMU, there is no alternative economic policy possible at the moment. A fight for policy change (against austerity) following a national election was in effect turned into a fight for sheer survival with the result that Greece was happy to be alive without policy change. Again, a massive democratic problem in the absence of proper Eurozone democracy.

• The suspicion of Germany is back. This is very painful for me as a German but I am afraid that Merkel’s and Schäuble’s politics have been nothing short of a disaster for Germany too (in addition to Greece and Europe). For years, the population has been fed a wrong narrative of what the real problems are and the ruthlessness with which a purely national view was enforced has nothing to do with European partnership anymore. Especially Schäuble has become a real liability. He should pack up and leave office immediately. Paul Krugman has a point when he asks “Who will ever trust Germany’s good intentions after this?”

• The German hard-line has also opened up a division with France (and Italy). It looks like the “deal” rather than Grexit was only possible because Francois Hollande finally stood up an confronted Merkel. The Franco-German engine has always been at the heart of European integration and at the heart of the Euro in particular. If there are fundamental divisions such as whether you can shrink the Eurozone or have to keep it together the situation does not bode well at all for the future.

• A “lack of trust” has often been cited as one of the problems with the Greek government. I am afraid we now have lack of trust all around! The political machine at the heart of EMU, that usually produces consensus and compromise, appears seriously damaged as the Eurozone has fragmented into different groups pursuing national politics. You cannot keep together a currency union like this in the long-run. Take this from the Financial Times for example:

A senior official in the room believed that Germany was now the country that appeared to be acting in bad faith — no longer the Greek prime minister Alexis Tsipras. At one point, Mr Tsipras had to endure a lecture from the Slovenian prime minister, to which Italian prime minister Matteo Renzi objected.

Eventually, François Hollande, the French president who has battled to keep Greece in the fold, ushered Ms Merkel and Mr Tsipras into Mr Tusk’s office to finalise a compromise on the privatisation fund. Although they were ultimately successful, the negotiations appeared to strain the Franco-German relationship long at the heart of the European project.

We will now see whether the ECB gives more breathing space to the Greek banking system and how national parliaments in Greece and elsewhere react to the new developments. This “deal” has taken fears of Grexit away in the short-run but you shouldn’t think that this solves the problem. When it comes to Greece there are too many questions (debt restructuring, …) that remain unanswered and the general direction is continuation down the wrong path. But yesterday’s events have also revealed a whole set of wider issues in the Eurozone that will be very difficult to address (especially the lack of democracy). Stay tuned for more trouble…