Bloomberg View — At the end of last week, amid much smiling and hand-shaking, European finance ministers said they were ready to give Greece a new bailout of 86 billion euros. It’s the third time in five years they’ve declared victory in the battle to revive the Greek economy. This latest triumph shows every sign of being as durable as those previous failures.
The first challenge is to get the deal, regardless of its merits, up and running. Germany’s parliament is due to vote on it this week, and rebellion is stirring in Chancellor Angela Merkel’s party. The bailout is thought likely to pass despite the protests, thanks to support from other parties in the Bundestag — but skepticism in Germany and some other euro-area countries runs deep.
Greece’s Financial Odyssey
That’s a problem because it suggests low or zero tolerance of any departure by Greece from the program it has agreed to — an extraordinarily demanding series of tax increases, spending cuts and structural reforms. The scope of the plan all but guarantees some backsliding. Greece is resentful and agreed to the terms only under extreme duress. Prime Minister Alexis Tsipras’s ruling Syriza party is deeply split on the issue, and fresh elections may soon be necessary.
Supposing that these difficulties can be overcome, and the program is followed conscientiously, will it work? That depends on what “work” means. The program assumes that output will contract even further both this year and next. Recovery after that, according to the International Monetary Fund and most observers, will depend on new debt relief. Speaking after last week’s meetings, IMF Managing Director Christine Lagarde said: “I remain firmly of the view that Greece’s debt has become unsustainable and that Greece cannot restore debt sustainability solely through actions on its own.”
This complicates things even more. The IMF is rightly embarrassed by its participation in the two previous bungled bailouts, and has warned that it won’t join the third unless debt relief “well beyond what has been considered so far” is part of the plan. Germany and its supporters, on the other hand, have opposed new debt reduction throughout — while insisting that IMF participation in the new bailout is vital.
Merkel this weekend said lower interest rates and new maturity extensions — though not, presumably, outright write-downs — were possible, and she was confident the IMF would sign up. German Finance Minister Wolfgang Schaeuble, who has spent most of this year insisting on steely-eyed clarity about Greece’s obligations, says he is “assuming” the fund will get on board. If this is clarity, one shudders to think what confusion would look like.
Greece still needs the same three things it has needed since 2010: a home-grown commitment to structural economic reform; a program of fiscal consolidation, sufficiently forward-looking to leave room for short-term recovery; and outright reduction of debts that it has no hope of being able to repay. The deal announced last week might be better than nothing, and will probably succeed in postponing the next crisis by a few months. It fails nonetheless in all three respects.