A Deal to Make a Deal
Greece can declare a small victory. As Prime Minister Alexis Tsipras stated Friday evening, “a battle has been won, but not the war.” Since their new government was elected with a mandate to better the terms of their bailout, they have now successfully dealt themselves more time to negotiate with other member European countries and the IMF. Whether negotiations will be successful four months from now and they will actually be able to deliver on their mandate against austerity is still to be determined. The headline “Greece Reaches Deal with EU,” which sent financial markets joyously higher was not based on a solution, but instead a deal to make a deal four months from now as we revert back to the oft to used expression of kicking the can down the road.
Credit can be given to Greece because they have managed to single handily isolate Germany as the ‘bully’ of Europe. Since this government was elected a little less than a month ago, their first condition for negotiations was to deal with European nations individually. Greek Finance Minister Yanis Varoufakis startled financial markets with the statement, “we will no longer negotiate with the Troika,” referring to the 3 member group of creditor institutions: the European Central Bank, the International Monetary Fund, and the European Commission. Instead, he chose to threaten their stability and expose their fragility, which ironically depicts the problems of the euro currency. The members are not united as they differ dramatically in terms of culture and politics, which questions why they also back a common currency.
This calculated move by Greece is what’s bought them more time to potentially break and renegotiate the terms of their original bailout. Single handily isolating Germany and gaining support from Italy, the third largest EU nation means that some of the institutions that originally dealt Greece their bailout terms are now fractured. Very simply, Germany now faces the challenge of keeping other influential voices like France and Italy united with their own. And that predicament seems to suggest Germany may be losing its hold on power in these negotiations, as was suggested earlier this month.
There are three possible outcomes for Greece’s negotiations with the other EU nations. The first is they simply leave the Euro. The implications of this are far reaching and a treacherous story from bank runs to a Greek government that is unable to raise revenues from credit markets. Second, Germany maintains a united voice through Europe and Greece’s new Syriza government is forced like past governments to accept the hand they were dealt. The third option, which became more likely on Friday, is Greece does manage some victories to ease the bailout terms and move away from austerity budgets.
This question is what will eased bailout terms actually achieve for Greece?
Some economists have actually argued that austerity in itself has been a myth for Greece. Because of the way bailout terms have been negotiated with low interest rates for a long enough time period, debt burdened Greece actually spends less than both Italy and Ireland on debt service payments (interest paid on their debt) every year. As well, because so little of their budget goes to servicing their debt this brings into question, how much austerity is actually being imposed or indeed avoided from the bailout?
Through the recent quantitative easing announcement, the ECB has created some stability for the euro market for the time being. This allows investors to focus on geopolitics instead of the economic stagnation of the Eurozone witnessed through the second half of 2014. As the Germans are and will remain the largest creditor, they will always remain at the table for debt talks. But the question should be asked, without a united institution representing the lenders, what’s their tipping point for keeping Greece in the euro?
The pending answer to that puzzle will keep markets volatile end edgy for some time.