Nobody is quite ready to celebrate, and the deal Greece appears to have struck with its creditors on Tuesday morning is not the stuff to induce a party mood anyway.
There is little to surprise those combing the details leaking out in press reports. How could there be, given how extraordinarily detailed were the conditions set by creditors in July’s hair-raising crisis summits?
The path outlined for primary budget surpluses, however, gives cause for cheer. While the target for 2018 was agreed last month — government revenues should by then exceed spending (excluding debt service) by 3.5 per cent of gross domestic product — the tightening will take place later than Greece’s creditors had previously insisted. For 2015, a primary deficit of 0.25 per cent is required. Given the economy’s return to recession, that may still entail a budgetary squeeze. But then little further austerity is needed to achieve the 0.5 per cent surplus target for 2016; the bulk of the consolidation will happen in the last year of the period.
This is a welcome sign of more enlightened self-interest from the creditors. No one benefits from making Greece’s debt burden worse by excessively squeezing an economy in recession. It bears remembering that in 2014, when Greece’s economy recorded three quarters of growth afters five years of recession, was also the only year in which the country undertook no structural budget tightening.
Substance aside, that a deal is being finalised itself tells volumes.
The European Commission has stressed that the talks that have apparently come to a successful end were technical discussions, and the deal they produced in principle still needs to be backed by a political agreement. But this underplays how big a reversal has taken place in the Greek approach.
Recall that for the first half of this year, the Syriza government insisted on lifting discussions from the technical to the political level, in the hope that other leaders would heed its calls for a new approach. That strategy, as we know, failed. The Greek capitulation not just on the substance, but on the process, has no doubt helped speed things up.
Note also how quickly Germany has found itself alone in the emphasis that a thorough deal is better than a speedy one. That insistence was always a bit odd given the thoroughness of what was on the table already, but Berlin’s concern that a deal needs to hold up for the full three years for which it is projected reflects the continuing lack of trust between creditor and debtor.
The hard stance that Berlin took in July — not least its suggestion that Greece be suspended from the euro — has triggered shock in other European capitals. It is provoking reactions that we are only just starting to glimpse.
One seems to be a determination not to be held hostage by German recalcitrance any more than Greek obstreperousness. Hence the broad support for getting a deal wrapped up before August 20, when Athens must redeem a bond held by the European Central Bank, rather than arrange another bridge loan and keep stringing negotiations along.
The ECB itself is arguably the most immediate beneficiary of the technical agreement. It gives the central bank a pretext for getting out of the corner into which it has painted itself, where it claims to be able neither to force a restructuring of Greek banks nor to grant them enough liquidity to facilitate the smooth flow of payments between one eurozone member and the others. The fact of a deal makes it easier to let funds flow more freely; and the deal itself suggests a bank restructuring and recapitalisation is in the works.
Where does all this leave Greece and the rest of Europe’s monetary union? The slightly slower pace of austerity aside, the deal is no better and no worse than it was in July. The economy will have a tad more breathing space than expected. Some of the reforms — if implemented — may improve growth rates in the post-recession future, still years away. Others are likely to make little difference; they could even make things worse.
In any case, the detailed policies are not what matters. Far more important is whether the deal succeeds in restoring certainty that Greece has a future in the euro. If it does, investment and spending will return. Otherwise, they will not.
The drama of July frightened not just Greece but also other countries enough to make them back away from the brink. That is good news. But fear is a shaky foundation for confidence. It will take more for the eurozone to climb out of its deep economic and political hole. At least it seems to have stopped digging