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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
