The agreement reached by eurozone leaders in the small hours of Monday morning could be a turning point for both Greece and the eurozone. It holds the potential to put Grexit aside once and for all, and prove in practice the “irrevocability” of euro membership.
But the agreement’s implications go well beyond this. For Greece, it represents the end of illusions, and of all the populist myths cultivated over the five years since the crisis began. And for the eurozone, it represents a dangerous tipping point, where insisting on strict rules in exchange for solidarity in one part of Europe is perceived as heavy-handed hijacking of the democratic process in another.
How did we get here? Five months ago, after five years of tremendous economic and social pain – some of it unnecessary – the Greek economy was growing again. After one of the largest fiscal consolidations in history, the Greek state was finally spending less than it collected in taxes (interest payments aside). Unemployment, though still unacceptably high, was beginning to fall. What lay ahead was a promise of additional debt relief for the economy to breathe under its huge debt burden, and economic and social recovery as lower primary surpluses and reforms got the economy going again, this time on a sustainable footing.
It took five short months with a Syriza government to destroy all which was painstakingly – and with many mistakes – built over the last five years. A projected growth rate of almost 3 per cent for this year has now turned into a recession, and the primary surplus has became a deficit. Capital flight led to the imposition of capital controls, and the economy went into a tailspin. Whatever mistakes one can ascribe to previous governments in the handling of the crisis, one thing is certain: they never allowed things to get to this.
Greek protesters set fire to a Greek flag
Syriza came to power on the back of populist promises that could not be kept, riding a wave of European sympathy in a continent tired with austerity. They were embraced by progressives around the world who chose to overlook the true nature of the new Syriza-Anel government: a coalition between an authoritarian statist left stuck in the 1980s, and a xenophobic, anti-Semitic, conspiracy-theory extremist right. In their short time in power, they have exhibited the worst clientelist behavior, punished entrepreneurship, opposed excellence in schools and universities, attempted to muzzle the press, and threatened openly all those who dared to disagree with them.
When dealing with our European partners, they exhibited a mix of ideological blindness, lack of understanding of basic eurozone institutions, unforgivable brinkmanship and plain incompetence. They initially refused the bailout money; then entered negotiations, and just as an agreement was at hand, announced a referendum on a yet to be agreed EU proposal, giving the Greek people a week to take a decision that could define the country for generations. The referendum was supposed to bolster the government’s negotiating position. Instead, a week after an astounding 61 per cent vote against accepting the proposal on the table, and with all trust lost with the rest of Europe, the government caved in and accepted a much worse deal.
Despite all the bravado, the Greek government and its game-theory experts were clearly outplayed. In fact, they played straight into the hands of those willing to see Greece exit the eurozone, or in the very least extract painful concessions to allow this not to happen. In a textbook case of how not to negotiate, Mr Tsipras maneuvered himself into a corner, finding himself with an economy under capital controls, and a state unable to pay wages and salaries. The rest of the eurozone waited patiently for the game to play itself out. Faced with the abyss, the prime minister capitulated.
In doing so, he thankfully ignored his own Left faction, the Eurosceptics cheering him on in the European Parliament, and even Nobel prize-winning US economists advocating from a safe distance a Greek exit from the eurozone. He understood full well what it meant to be branded the prime minister who bankrupted the country and plunged it into economic, social and political chaos. He has now crossed the Rubicon.
Where are we heading now? The text agreed on Monday is not a finalized deal for new financing; it simple sets out the preconditions for negotiating a third bailout in excess of 80 billion euro. On substance, few people outside core Syriza supporters would disagree with its provisions for pension and tax reform, opening up of product markets, and pursuing privatizations. But unfortunately the agreement is colored by the ill-advised and humiliating proposal for a 50 billion Euro asset fund – acting in effect as collateral for the loan Greece has requested. And worryingly the fiscal path as we move ahead – with its associated austerity measures – remains to be negotiated. It will not be an easy sell on a tired Greek society.
Having crossed the Rubicon, Mr Tsipras now faces two stark choices. The better one for both him and the country is to realize that there is no way back - his ships are now burned. He needs to disown his old comrades of the extreme left, swiftly reshuffle and broaden his cabinet, and govern as a minority government with the help of the opposition. He is lucky in two respects: he is the only prime minister during the crisis who can count on opposition support; and he faces no convincing political figure to challenge him.
The alternative is for him to throw in the towel, and tell the people that his principles do not allow him to implement the deal he has just agreed to. This will plunge the country into a new political crisis, and may lead the rest of Europe to conclude that Greece is a lost case after all. We will soon find out what he is made of.
George Papaconstantinou served as the Greek Minister of Finance between 2009 and 2011 and signed the country’s first bailout agreement.
