Greece and the European Union have reached another deal. A second bailout will avert a Greek bankruptcy, although the reprieve is likely to be only temporary. The harsh austerity measures that the EU is demanding as a condition of its aid, ironically, are likely to make it even harder for Athens to reach its debt targets. But the deal has bought Greece and the EU time to prepare for the next crunch and its potential to spill over into other parts of the union.
Both Greece and the EU have struggled with that country’s solvency since the scale of its indebtedness became known a couple of years ago. (Creative budgeting hid the size of the country’s problems from the Greek public, opposition politicians and the EU itself.) The prospect of bankruptcy and a subsequent contagion among other euro economies spurred the EU to inject $145 billion in May 2010, an effort that ultimately failed as restructuring measures could not put the economy back on its feet.
Facing default when a $19 billion debt payment comes due March 20, Athens and the 16 eurozone governments entered into another round of negotiations. They struck a deal Monday night after 14 hours of negotiations that will provide Greece with another $172 billion in exchange for tough austerity measures. Among those measures is a cut of 150,000 public sector employees (a staggering cut in a country of just 11 million people), a reduction of the minimum wage by 22 percent, pension cuts and stepped up measures to sell Greece’s publicly owned companies.
In exchange, private holders of Greek bonds will write down 53.5 percent of the nominal face value of their debt; about 100 billion euros will be written off as those holders swap their current bonds for longer-dated securities with a lower payoff. For its part, the European Central Bank will pass to national central banks the profits it received from the €38 billion worth of Greek bonds it bought over the past two years.
All of this is intended to bring Greek debt down to 120 percent of GDP by 2020 — an amount the EU considers sustainable. But running the numbers suggests that the target is unattainable. Currently, the Greek economy is on a downward spiral — it shrank 7 percent in the third quarter of 2011- and unemployment is a staggering 21 percent. Yet, after the additional layoffs demanded by this week’s package, and the requirement to find another €325 million in “structural expenditure reductions,” the economy is expected to go flat — i.e., zero growth — by next year and start to grow by 2014.
How? Where will the demand come from?
While their situation is desperate, it is hard to imagine Greek voters swallowing this pain. When the government started to implement measures already agreed — and already deemed inadequate — Athens exploded in violence and 43 members of the ruling coalition bolted their party.
The demand by the eurozone economies for a permanent presence in Athens to monitor implementation of the agreement is a sign of the complete breakdown of trust between the Greeks and their creditors. This condition will only inflame nationalist sentiment, as will the European statement that new bailout funds are to be put into a special escrow account that Greece can use only for debt payments, not for ordinary government expenses.
An election is expected in Greece sometime later this spring, and the unpopularity of the current austerity measures has already bolstered the standing of anti-bailout parties. Yet the bailout plans must also be approved by national legislatures in three European countries — Finland, Germany and the Netherlands — and failure to implement the additional measures will likely undermine their prospects of passage. Already, voters in some countries are making their displeasure known. There has been a surge in support for anti-bailout parties in the creditor states as well.
So, there are unrealistic economic assumptions piled atop very real pain that is likely to upend the political process. Why then the euphoria? If nothing else, because the deal buys time. A Greek default has been delayed and that gives the eurozone governments more time to shore up the faltering and considerably larger economies in Spain and Italy. The immediate reaction of the bond markets was a drop in yields for those two government securities.
Equally important, the other European governments will have time to assess the meaning and significance of the entire European project. Even if the bailout works as planned, Greece will be a ward of the EU for the rest of the decade. That is an extraordinary burden — on Europeans and Greeks. This plan is a temporary fix for a more enduring problem — the creation of a single currency without a unified fiscal policy to back it. The time has come for Europeans to look hard at the shortcomings of their euro community and decide if they have the stomach to fix them once and for all.
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