Two weeks ago, the world breathed a sigh of relief as the Greek government forced through Parliament a new bailout deal. Prime Minister Alexis Tsipras admitted to his supporters that he had signed a text he did not believe in: his Finance Minister, Euclid Tsakalotos, described the day after the Euro summit as the “toughest day of his life”. But with the support of opposition parties, the first tranche of reforms were forced through the Greek parliament on July 15th, followed by a second tranche on July 22nd.
Some reforms – notably the VAT rises – were immediately implemented. But we know that Greek hearts aren’t in this. Neither the government nor the Greek people really want this bailout. They want debt relief and an end to austerity: but what they are getting is more debt and even more austerity. Will they swallow it? The creditors are – understandably - sceptical.
Nonetheless, legislation has been passed, and that is supposedly sufficient for talks about a third bailout to begin.
Except that it isn’t. Every excuse under the sun has been used to avoid actually starting talks. Firstly, there were “logistical issues”. The Greek government had reluctantly agreed to work with the hated Troika technocrats, but that didn’t mean it was going to make their lives easy. Citing security concerns, it insisted that they stay in a hotel outside Athens. This did not go down well. The Troika representatives refused to hold the talks in the hotel. Eventually the Bank of Greece offered to host the talks.
And as soon as the talks started, a group of creditors led by the German delegation moved the goalposts. They demanded that the Greek government push through a third tranche of reforms as a pre-condition for a new bailout. In parallel with this, the German finance minister Wolfgang Schaueble objected to the “politicisation” of the European Commission. According to the German newspaper Frankfurter Allgemeine Zeitung (FAZ), Schaueble sternly suggested that Juncker’s habit of negotiating directly with Alexis Tsipras was usurping the Eurogroup’s role (translation by me with help from Google Translate, original in German):
In the Greek crisis, Juncker wanted, and wants, not simply to understand the Commission as part of the troika creditors who reviewed the implementation of the agreed reforms in Athens and now negotiate the technical details of the new assistance program with the Greek government. Rather, he has repeatedly negotiated directly with Prime Minister Alexis Tsipras and so reinforces his claim that there must be "political" agreement on new loans and a haircut at the highest level. Schäuble has repeatedly made clear that authority to negotiate this rests not with the Commission but the Euro Group as the representative of European lenders.
Hmm. Seems that there is something of a power struggle going on between the Eurogroup (or at least the German finance minister and his supporters) and the European Commission. President Juncker is hugely relieved that there is a deal: Wolfgang Schaueble is still pushing for Grexit, by fair means or foul. I’m not sure which one I would back to win.
But Dr. Schaeuble is not alone. German hearts are no more in this than Greek ones. The German tabloid Bild is disgusted at the prospect of more money going to lazy Greeks: German opinion polls show a clear majority in favor of Greek exit. There is a rift in the governing coalition between the pragmatic Angela Merkel, who sees more disadvantages than advantages from a Greek exit, and the ideological Dr. Schaeuble, for whom there can be no relaxation of the rules in order to allow Greece to stay.
Eastern European and Baltic states are broadly on the same page as Dr. Schaueble. And Finland is even more hard line. For them, Greece cannot have debt relief, because to do so would break the rules. If Greece’s debts are unpayable, or Greece will not accept the level of austerity needed to make them payable (yes, I know, this is economically illiterate – pace, macroeconomists!) it must leave the Eurozone. If it wishes to stay, it must swallow its bitter medicine – as they did.
But that is not the attitude of France. Or Spain, or Italy. “There but for the grace of God go we”, they think. And they encourage, cajole and in the end force Greece to stay, because otherwise their own future in the Eurozone suddenly looks terribly uncertain.
Greece’s capitulation has exposed the ideological divide between France and Germany. France, for whom the Eurozone is an indissoluble unit whose integrity must be preserved even at the expense of bending or changing the rules, and Germany, for whom the Eurozone is a rules-based institution which is unsuitable for those who are unable or unwilling to abide by its rules. It is hard to see how these two views can be reconciled – but reconciled they must be, if the Euro is to survive. Proposals from both sides for closer union and federalization appear to establish common ground, but are in fact based upon views of the union that are wholly at odds with each other.
So the Greeks don’t really want the deal, the Germans don’t really believe in the deal and the French are terrified that the deal will fail. This is not a good basis for an agreement.
The ECB is painfully aware that the future of the Euro is at stake. German proposals for “temporary exit” of Greece from the Eurozone for the first time acknowledged that a member state could leave. No-one was fooled by “temporary exit”. Either exit would prove better for Greece than membership, in which case not only would Greece be unlikely to return but others might follow it out of the union, or it would prove worse, in which case Greece would not be allowed back into the Euro. The ECB is desperate to keep countries in the Euro. Unsurprisingly, therefore, its basic position is similar to the French stance: bend the rules, for goodness’ sake, before the whole thing unravels (and we lose our jobs). Debt relief is necessary, so let’s stop arguing about it. Oh, and please stop expecting us to enforce the rules. We hate being hated.
It seems that we have the beginnings of a showdown. On the side of those who want a smaller, closer union without “passengers”: Germany, the Baltics, the Finns, the Eastern Europeans, probably the Dutch. On the side of those who want to make the present union work, even if it means relaxing fiscal rules: France, Italy, Spain, the ECB, the European Commission, perhaps Austria. Where is Greece in this? Keeping quiet and doing as it is told (except for its firebrand ex-Finance Minister, of course). And Alexis Tsipras is trying to keep his flaky party together and hold on to power. That is taking a lot of his energy.
Then there is the IMF. On paper, the IMF’s position is compatible with that of the French bloc. Indeed it is rather stronger. The IMF has stated categorically that it will not lend unless there is both a credible reform effort from Greece AND commitment to up-front debt restructuring from creditors.
The Eurozone leaders knew before the deal was struck that the IMF regarded debt relief as necessary. They concealed the findings of the IMF’s DSA in order to force the Greek government to accept a deal that the IMF had already said it would not support. The sheer duplicity of this beggars belief.
But the trouble is, no-one believes the IMF when it says it won’t lend. It bent its rules twice before in order to rescue Greece (or rather the Eurozone). And although the “systemic risk” that was previously used to justify IMF lending to a country whose debt was unsustainable is now supposedly dead, it wouldn’t take much to resurrect it, really. Just imagine what would happen to sovereign bond yields if the Eurozone creditors lost all that money. Hmm.
The IMF is unmoved. It has now repeated three times that it sees no reason to lend. And according to the FT, minutes of a board meeting discussing the Greek situation state explicitly that official holdings of debt in the view of IMF staff present few systemic risks:
“In 2010, the systemic waiver was applied as a restructuring of the debt in hands of the private creditors was needed to restore debt sustainability, which could have caused major contagion,” the minutes state. “Currently, a restructuring of official debt is required and staff could think only of a few instances in which public debt restructuring could create contagion.”
But Germany will not proceed with the bailout without the IMF’s involvement. Deadlock.
Could this bailout proceed without the IMF? Frankly, no. The FT’s Peter Spiegel helpfully crunched some numbers and concluded that – largely because of the idiotic restrictions that the Eurozone chooses to apply to itself – the deal seems to have a funding shortfall of about 24bn Eur:
With privatization profits and budget surpluses uncertain, the IMF a wildcard, and no signs the private debt markets are in any mood to buy up Greek government bonds any time soon, it may not be all that easy to find an extra 24bn Eur lying around.
So we have a deal which half the participants don’t really want, the other half don’t really think will work, and which can’t really be funded anyway.
The wheels are already coming off this jalopy. It isn't going to get much further in its present condition.
