Greece Stays in Euro

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And Strikes Deal to Keep Bailout Money Flowing in

statue-of-athenaGreece has managed to avert a potential run on its banking system and an economic collapse with a last minute deal with the troika of European Commission, International Monetary Fund and European Central Bank, which will keep the bailout money flowing in the country for four more months. While parties on both sides of the negotiating table claimed victory, the reality is that both sides came down a few steps from their stated high positions. Greeks, however, had to swallow much of their pride and agree to more or less everything that they, over last few months, had been vowing they won’t. Beyond the immediate deal and relief that it has brought, there are symptomatic issues that need attention.

Hailed as the first post-modern group of nations which has redefined the concept of nationhood and national independence, Europe has had anything but a smooth ride over last few years. Because nations are at different stages of development with different types of economic structure, their requirements also are radically different from each other. However, to stay within the Euro system, each has to sacrifice certain level of economic freedom
which sometimes runs counter to the political predilections of that country. And when a country is forced to run policies which affirm to the standards of the group and counter to the perceived interests of the people, radical political entities are thrown up by societies which threaten the Euro system. What has played out in Greece over last couple of months and the reverberations that it has generated in some other countries such as Spain, Italy and Portugal, is latest example of the same.

The Deal
The deal that Athens struck with creditors keeps the essential components of the Austerity Plan that the Greek government had agreed to in order to secure the € 130 billion bailout package back in 2012, which had come as an add on to a € 110 billion bailout that was announced in 2010. The bailout package was about to lapse at the end of February if the deal was not struck. The deal allows the bailout money to keep flowing in for four months and gives the Greek government time to initiate critical reforms as per the austerity plan.

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German and Greek finance ministers have been at odds over the conditions of the bailout package

The austerity measures had forced the Greek government to cut public spending, reform tax system, privatize businesses, end job guarantees and most critical of all, bring government budget in surplus, which was supposedto prevent government from falling into a debt trap. All these steps left the economy in distress. Most people in Greece feel that these measures have been of no use; the growth is very low, real incomes have come down sharply, and jobs have just vanished. In such a scenario, they feel there is little value in continuing with these measures, to keep the bailout money flowing in.

The agreement that was reached on Feb 20, has seen no change in the commitment to continue with the austerity measures, much against what the new Greek government would ideally have wanted. According to the statement released by negotiators, “The Greek authorities commit to refrain from any rollback of measures and unilateral changes to the policies and structural reforms that would negatively impact fiscal targets, economic recovery or financial stability, as assessed by the institutions.” This is crucial because even though the Greeks have been allowed to frame their own reform package, the overall sum and substance of the package would still have to confirm to the fiscal parameters  set by the conditions of the 2012 bailout package.

With the deal having been struck, billions of euros from the 2012 bailout program will be released to prevent the Greek government from going broke which it could have, in the next few months, sans a deal. Crucially, the Greek banks would receive up to € 10.9-billion in funds to bolster their capital.

Whatever be the terms of the deal and the posturing over who won or lost and by how much, what is crucial is that post deal, Greek banks will have access to eurozone funds for recapitalisation, which would stench the outflow that has been going on for last few weeks. According to JP Morgan Chase, during the week ending Feb 20th, depositors withdrew almost € 3 billion from the banking system.

On their part, the Greek government presented the reform package that it planned to implement in order to strengthen the economic structure of the country. As per the letter of the Finance Minister, Yanis Varoufakis, the Greek government would not roll back any ongoing or completed privatizations and ensure that any state spending to address a “humanitarian crisis” does not hurt its budget. On the issue of reforming the bleeding pension system, the letter said that pension funds would be consolidated to achieve savings, and eliminate loopholes. The proposed list of reforms also included items which run against the election promises of Prime Minister Alexis Tsipras. Crucial among these is the promise that public sector wage system would be reformed in a way that would not reduce pay further but would ensure that the overall public wage bill does not rise. The Euro zone countries agreed to the reform package, but urged the Greek government to broaden the reform.

grecce-GDPWhat the Greek government has been able to get a concession or rather a face saver is on the issue of deadlines to bring in budget surplus and its level. Against the commitment of previous Greek government to run high and increasing primary budget surpluses, basically the net surplus after stripping out debt payments, of 3 per cent and 4.5 per cent of GDP, the new deal allows the flexibility by imposing no quantitative targets. Instead, the statement said, “The institutions (EC, IMP and ECB) will, for the 2015 primary surplus, take the economic circumstances in 2015 into account,” leaving some

room for the Greek government to manoeuvre its finances if the economy nosedived. This concession has been hailed as a major victory by the Greek government which claimed control on how it wanted to reform and at what pace.

Taking Left Turn in Frustration
The economic problem that Greece is finding itself today has developed over the years. The country joined the  euro zone in 2001 and even then, it was running a public debt of more than its GDP, which grew even faster after joining the euro zone, thanks to the inherent issues of the euro mechanism, which we would talk about later.

After the financial crisis hit in 2008, the flow of easy foreign money to the country dried up. This caused an economic meltdown and debts became unserviceable. To prevent the economy from collapsing, the euro zone moved in, first in 2010 and again in 2012, to bail out the economy. In return, Greece pledged to reform its economy and undertake the financial austerity measures. But these measures led the economy to slow down and further rise in public debt, which currently stands at around 175 per cent of its GDP. The country’s economy has shrunk by about 25 per cent over last six years. Though the growth has moved in positive territory, the result on  real income of people on street would take many months to show. Unemployment would remain at uncomfortably high level of 22 per cent in 2016, the European  Commission says.

It is in this environment of utter gloom and frustration that the country veered towards left. The far-left Syriza party, headed by Alexis Tsipras promised to reject the conservatism that was  imposed by the austerity plan and asserted that the conditions of the bailout be renegotiated. Tsipras, the youngest Greek prime minister at 40, had come to power on promises to increase the minimum wage and reinstate fired public sector employees. His appeal echoed the widespread sentiment in the country and also in some other countries of Europe such as Spain and Portugal.

However, the real politics of the government is much different from promises made in public rallies while campaigning for election, as Tsipras and his government has found out. While it is true that the austerity measures imposed by Germany led creditors and financial institutions are unjust to a large extent, it is equally correct that withdrawal from the Euro system, which would have been inevitable if the deal would have failed, would have harmed Greece more than anyone else. The government does not have money to kickstart the economy and the run on the banking system could have caused the economy to collapse altogether. This realization explains the climbdown of Greek government on negotiations with the troika.

While Tsipras has managed to get some elbow room and time with the deal, the going would be anything but smooth moving forward. While a large number of Greeks feel that the deal, though not ideal, is perhaps the best they could have got, there is also a strong group which resents the deal, feeling that the new deal is almost identical to the last one in substance. Also, the far left elements in the party is naturally miffed with the deal and that may be trouble for Tsipras’ leadership. As such, the challenge for the Syriza would be to first convince the population about the virtues of the deal and then get the deal ratified by the Greek parliament.

The Message for Europe
The support that Tsipras has received among population in some other Southern European countries is indicative of the popular resentment in that part of Europe on the manner in which economies in a few countries
in the region have been held hostage to the ‘prudent’ policies dictated by European Community (EC), European Central Bank (ECB) and some Northern Europe countries such as Germany and Netherlands. There is an undercurrent against imposition  of tough conditionalities which many people feel serve the interests of lenders, while making lives of a large number of people miserable. While it is hard to brand any one party wrong into to, there are problems in the structure of the Euro system which results in occasional flare ups in different countries and threatens the survival of Euro as a single currency entity.

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“We have won the battle but not the war…… we showed that Europe can be an arena of negotiation and mutually acceptable compromise and not an arena for exhaustion, submission and blind punishment …” Greek PM Alexis Tsipras, commenting on the debt deal

At systemic level, there are some marked trends that help in explaining distress in parts of the continent. In the aftermath of forging a common currency, a large sum of money flew from those countries which had massive trade surpluses into those countries of the Euro zone which were running trade deficits. Germany and the Netherlands formed the core of first group whereas PIIGS (Portugal, Italy, Ireland, Greece and Spain) countries formed the latter group. These PIIGS countries saw massive asset bubbles as they couldn’t channel foreign money in productive economic activities. After financial crisis of 2008, the recessions in these countries resulted in high unemployment.

While Greece has managed to stay in the Euro system for the time being, the massage for the European Union and the most powerful economies of the continent, namely Germany, France and the Netherlands is clear. They must find a way to manage the huge discrepancy among countries and the unbridled money flow between Euro zone countries. Most crucial requirement is, however, is to figure out a brand new philosophy on how bailouts should be created and implemented. At the end of the day, if bailout packages don’t cater to the needs of people in streets, they would ultimately fail, regardless of mechanisms to save creditors’ interests.