It seems all but done — Greece’s government and the ‘troika’ of the International Monetary Fund, the European Central Bank and the European Commission have reached an agreement on the latest disbursement of funds that Greece needs to finance government operations, in exchange for a series of budget cuts and labor market reforms.
In an additional twist, there are quasi-official reports from both Germany and Greece that the bailout program will be extended from the end of 2014 to the end of 2016, which will give Greece until at least 2016 to whittle down its budget deficit to the 3% required under EU rules, though it seems unlikely that Greece’s budget will be anywhere near to closing in on that target by even 2016.
The details are essentially as described over the past four months — €13.5 billion in budget cuts over the next two years, €9 billion of which will take effect in 2013. The bottom line for Greek finances is that a Greek exit from the eurozone, which seemed virtually inevitable through much of 2012, has now been delayed, and delayed for a significant amount of time (Citi, for example, lowered its odds of a ‘Grexit’ to 60%, and predict it could still happen, but only in the first half of 2014).
That’s a significant victory for Greece’s prime minister, in office for barely four months, Antonis Samaris (pictured above, right, with Euro Group president and Luxembourg prime minister Jean–Claude Juncker), and it will now give him some breathing space to turn to Greece’s economic depression.
For me, there are three notable political aspects to the deal worth noting:
First, the wide pro-bailout coalition has remained intact. After two tumultuous elections in Greece, first, and inconclusively, in May and then in June, Samaras’s center-right New Democracy (Νέα Δημοκρατία) won the largest share of votes, but only after the second election could Samaras piece together a workable governing coalition, bringing together the traditionally center-left PASOK (Panhellenic Socialist Movement – Πανελλήνιο Σοσιαλιστικό Κίνημα) and the anti-bailout Democratic Left (Δημοκρατική Αριστερά).
That Samaras’s coalition has kept intact over the course of the negotiations is impressive — and wasn’t necessarily a foregone conclusion. Although it’s not going to do much for their short-term popularity, PASOK’s leader, the former finance minister Evangelos Venizelos, and Democratic Left’s leader, Fotis Kouvelis, will have sacrificed much of their political strength to give Greece a shot at remaining in the eurozone. Late last month, upwards of 50,000 protestors marched on Athens in riots that turned rowdy, if not violent, so the country’s mood remains incredibly grim as it enters what’s likely to be its fifth year of economic contraction.
PASOK, in particular, stands on the brink of political extinction — it agreed to Greece’s first bailout under prime minister George Papandreou in 2010, and it joined ND joined in November 2011 to support the appointment of technocratic prime minister Lucas Papademos in order to pass Greece’s second bailout.
Second, the Europeans have effected, if not a 180-degree turn, at least a 145-degree turn, on Greece. After German chancellor Angela Merkel led the chorus of European leaders in support of Samaras in the June elections, it seemed incumbent upon those same European leaders to give Samaras some slack when Greek voters (narrowly) chose Samaras over the anti-austerity SYRIZA (the Coalition of the Radical Left — Συνασπισμός Ριζοσπαστικής Αριστεράς), led by the young, charismatic Alexis Tsipras.
Earlier this year, Europe seemed nonchalant about ‘Grexit’ — the economy was in (and remains in) free fall, Athens was in political turmoil after years of financial mismanagement, and the Greeks cooked their books in order to meet the eurozone accession criteria in the first place. European leaders, however, have also expressed increasing confidence in Samaras and his finance minister, Yannis Stournaras.
Even IMF managing director Christine Lagarde has aired public doubts about the negative impact that harsh austerity measures have taken on downtrodden economies, especially Greece’s — by cutting budgets at a time of relatively economic weakness, governments have further reduced the amount of aggregate demand within their countries, thereby further depressing their economies and reducing the tax revenues, thereby making fiscal deficits even wider (and thus necessitating even more budget cuts to keep deficits from spiraling out of control). Greek GDP is contracting at an even faster rate — 3.25% in 2009, 3.52% in 2010 and 6.9% in 2011. The Greek unemployment rate has gone from just above 7% in 2008 to now above 25% (it vies with Spain for the European Union’s highest unemployment rate).
Of course, as a member of the eurozone, Greece cannot simply print more money or devalue its currency, as it could when its currency was simply the drachma. So it’s been undergoing what economists call an ‘internal devaluation’ — instead of lowering the value of its currency to make its exports cheaper, it must lower the costs of production — such as labor costs — in order to become more competitive globally. That, of course, has been painful for Greeks — especially at a time when bondholders and the ‘troika’ have demanded harsh cuts, which have in turn reduced funding for social welfare and services like heath and education. That’s having a negative impact on Greek society as well — for example, malaria is making a comeback in southern Greece and HIV/AIDS is rising due to the lack of funds for needle exchange programs, according to news reports.
European leaders, but especially Merkel and her finance minister, Wolfgang Schäuble, seem to be indicating both that they may share some of Lagarde’s misgivings about the effects of austerity on Greece’s economy, but also that the costs of a ‘Grexit’ are unknowable and, potentially, could cause another financial crisis like the one that occurred in September 2008 with the collapse of Lehman Brothers:
As for Greece, Schäuble tread more lightly on Tuesday than he did last week. In the knowledge that “we are all sinners,” he said, it seems likely “that we can come to agreement on a policy that makes sense for Greece.”
Third, it makes Greek politics much more interesting — although not necessarily hopeful — going forward.
So what next? Samaras’s two coalition partners, Democratic Left and PASOK, remain skeptical about the labor reforms, so there will likely be some amount of wrangling through early November over the exact terms of those reforms.
And then? Samaras will have won himself some breathing room from the immediate crisis that Greece’s treasury will run out of funds. But he will be left with even fewer tools to use his government in any activist way to spur the Greek economy. While it lasts, his coalition will basically be left to tend to carrying out the reforms and budget cuts passed for 2013 and beyond, and that will be massively unpopular.
That could lead to either Democratic Left or PASOK wanting to leave the governing coalition — SYRIZA is quickly consolidating support on the Greek left, which could eliminate both of its moderate leftist rivals.
So early elections in 2013 are not out of the question, but it’s not clear that another round of elections would be beneficial for Samaras or his allies — despite the apparent debt deal, radicals on the left and right are achieving even higher levels of support than during the elections in May and June.
For now, then, early elections would leave both of Samaras’s coalition partners even weaker. Greece, for now, is averting an immediate crisis, but it still remains unclear how its economy can recover and, in the long run, that’s the only thing that can save Greece from falling out of the eurozone.