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News : EU Economy Last Updated: July 13, 2015 - 8:30 AM

Greece's epic miscalculation vs. German-led hardline response - Grexit avoided
By Michael Hennigan, Finfacts founder and editor
July 13, 2015 - 8:30 AM

Angela Merkel, German chancellor, speaks to François Hollande, French president, with Alexis Tsipras, Greek prime minister, on the right, Brussels, July 12, 2015

The long divisive meetings of Euro Area leaders and finance ministers in Brussels on Saturday and Sunday show that Greece made an epic miscalculation in running out the clock on its second bailout while the German-led hardline response was aimed at winning maximum concessions to show domestic voters that there is no free lunch for the embattled Balkan country.

After two days of discussions, an agreement was reached just after 8:00 AM Irish time Monday on a €86bn bailout.

The strategy of running out the clock on the second bailout had dismally failed as it triggered capital controls and the likelihood of Grexit — the ouster of Greece from the euro system — no longer was a taboo issue for European leaders.

Euro Summit statement, Brussels, July 13, 2015

Last Thursday night, Greece presented reform proposals that met most of the credit demands that it had rejected in June.

  • On Monday Alex Tsipras, the Greek prime minister, is reported to have failed to exclude the International Monetary Fund from participation in a third bailout — the IMF was the only unit of the troika that has supported debt restructuring;
  • Tsipras had resisted a German demand for Greece to deposit €50bn in assets to be used for privatisation, in a fund in Luxembourg, that would also to serve as collateral for fresh loans. It will now be a fund of €50bn, based in Athens;
  • According to the terms, the Greek parliament has to endorse the entire package on Monday and then approve several pieces of legislation by Wednesday, including on pensions reform and a new VAT regime, before the Euro Area will agree to negotiate a new three-year rescue package.

“Grexit has to be prevented,” said Jean Asselborn, Luxembourg’s foreign affairs minister, according to The Guardian. “It would be fateful for Germany’s reputation in the EU and the world.

“Germany’s responsibility is great. It’s about not conjuring up the ghosts of the past,” he told German newspaper Süddeutsche Zeitung. “If Germany goes for Grexit, it will trigger a deep conflict with France. That would be a catastrophe for Europe.”

The Financial Times reports that the delay in reaching an agreement was testing to the limit the European Central Bank’s capacity to keep providing Greek banks with emergency finance. "Without progress in Sunday’s talks, the ECB would find it difficult to maintain its crucial support. With the Greek economy deteriorating, rescue costs have risen to €82bn-€86bn, according to a Eurogroup finance ministers’ draft statement, including €12bn needed in the next month and €10bn 'immediately' for bank recapitalisation."

“We campaign in poetry, but when we're elected we're forced to govern in prose,” Mario Cuomo, then New York governor, said in a speech in Yale University in 1985.

The ruling radical left SYRIZA party took power in late January after promising the Greek electorate that austerity would end while it would fund new social programmes.  

“Today the Greek people have written history,” Alexis Tsipras, SYRIZA’s young leader, said in his victory speech late Sunday Jan 25, 2015. “The Greek people have given a clear, indisputable mandate for Greece to leave behind austerity."

SYRIZA promised a " war against corruption and nepotism and [ ] the drastic reduction of tax evasion and of the black economy.”

SYRIZA said it would stop using primary surpluses (annual surpluses before debt interest) to pay down the debt, instead it would use surplus funds to reduce the state’s dependence on European structural funds and borrowing to cover its basic operational costs. It would also use ‘tax bonds’ (with the government mortgaging future tax revenue).

One source of useful revenue was sacrificed for ideological reasons and the previous government's privatisation programme was put on hold.

Greece was insolvent after five years of €240bn in European bailouts and on June 30 the country failed to make a €1.5bn payment to the International Monetary Fund while the second bailout expired.

Alexis Tsipras called a referendum to strengthen is position in negotiations. The Greek government then had to agree to capital controls to prevent runs on the banks.

Despite support of over 61% for a No/Oxi vote, it hardened the resolve of Germany and its allies including the Baltic countries and Slovakia, which are poorer than Greece, to present a choice of exiting the euro system or agree to harsh conditions before discussions on a third bailout would commence.

A big flaw in SYRIZA's strategy was that it did not have any plans for a Grexit.

Greece was star economic performer in 1950-1973; Budget deficits every year since 1974

Irish lessons for Greece on growing exports and investment 

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