Agreement has been reached over a deal to keep Greece in the Euro, for the time being at least. But, Mustafa Cirakli says, the problems in the country and the whole Eurozone are far from over.
Damned if you do, damned if you don’t! Such was the predicament in which the SYRIZA-led Greek government stood in last month’s negotiations with its creditors to ultimately determine whether the country could remain in the Eurozone.
It is no secret that Greek economy is crumbling and the impact of the severe austerity measures has brought the country and its people to their knees. Unemployment stands at 25% with a youth unemployment of almost 50%. Such unemployment further exacerbates the structural problems of the Greek economy, notably the pensions system in which one in two households depend on pensions to make ends meet. It is precisely this devastating impact of austerity which provided much of the ammunition for some of the naysayers in the run up to the controversial referendum to advocate a ‘default and run’ i.e. a return to the Drachma within a populist narrative which ties public sector salaries and pensions together with economic growth and national pride.
To the relief of many, an agreement was reached at the eleventh hour to avoid the inevitable catastrophe should Greece have left the euro. Only few would disagree that Athens would have no foundation to erect and sustain a currency regime with a collapsed banking system that was haemorrhaging deposits of up to EUR1bn a day in the run up to last month’s referendum. Tellingly, the secret plans revealed last week by the opposition included raiding the central bank and hacking taxpayer accounts as part of the Greek government’s “Plan B” to facilitate such a return. As one observer has noted, leaving the Euro would be akin to “jumping out of a plane without a parachute” which further explains why large numbers in Greece continue to support the country’s membership in the currency union.
In contrast, the agreement reached between Greece and its creditors on launching talks for a third bailout potentially worth 86bn EUR carries a heavy price tag in terms of more austerity but one that could pay itself in the long-term. The spending cuts and a rewrite of the VAT code will certainly be painful but the transferring up to €50bn worth of state-owned assets to a privatisation fund, radical reforms to create a sustainable pensions system as well as sweeping judicial reform to tackle clientelism, if managed properly, may offset the painful impact of further austerity by helping ensure public finance sustainability in the long term.
But how will Greece get there? The resumption of talks should be seen as a clear victory (for now) for those who wanted to keep the country in the Eurozone and firmly anchored in Europe but a great deal of responsibility will lie on Alexis Tsipras. To begin with, he faces the mammoth task of building domestic support in the passing of the reforms (and more austerity) from the Greek Parliament which has already disgruntled some of its own members. As the pressure continues to build, Tsipras may well struggle to keep his party together.
In the long term, Greece will also need to continue talks with the creditors to plan its economic recovery. With its current levels of debt, it shouldn’t be a shock to anyone that Greek economy will need long-term financing. This may ultimately mean some form of debt relief/restructuring (together with a ‘Marshall-style’ investment plan) to kick-start the Greek economy. As Jurgen Habermas has recently reminded us all, the Germans themselves are indebted “to the wisdom of the creditor nations which, in the London Agreement of 1953, wrote off around half of its debts.”
But what is at stake here isn’t just Greece. Ensuring that Greece remains in the Eurozone, firmly anchored on the path of economic recovery, must remain a key priority for Brussels and other European capitals in order to keep the Eurozone from disintegrating. Although the risk of a ‘domino-effect’ has largely been reduced thanks to the introduction of liquidity mechanisms by the ECB, a potential ‘Grexit’ following default would still hurt the European economies and induce instability across the continent. Such a messy departure would also hurt the European Union politically not least by providing ammunition for the extremist parties across the continent. To be sure, a radical leap forward will also be required on part of the EU to complement and strengthen its currency union with a monetary union that would see transfer of some fiscal policy-making responsibility to the European level. Recent reports of emerging political will in Germany is a particularly significant step in this direction.
Even if the worst may just be over, political maturity will be required on all sides to bring an end to the exasperating Greek saga. Given the high tensions and the lack of trust in some quarters of Europe towards the Greek government and perhaps for the right reasons considering the naturally volatile nature of Greek politics this may not be easy. European leaders will also face hurdles of their own in order to do what is necessary to further integrate the Eurozone economies. But no one should be under any illusion for what is at stake – Greece will be the very litmus test for the future of the European project.