EU Impaired by Greek Deal

via Leksika

 

Nearing the End

The Greek Crisis has pushed Europe to the brink. The deal agreed to on Monday relieved markets and points to a route for Athens to remain in the Eurozone. However, the deal provides no long-term solution to the crisis—it instead marks a long-term change in how Europe views and organizes itself. In the next two weeks, there are a multitude of ways for the deal to collapse before the bailout even starts, not least of which are the points of confirmation by Greece today and European national parliaments in the next week.

Implications of this deal abound, but they are largely negative. Aside from keeping Greece in the Eurozone for now, this agreement provides security to neither Athens or to Brussels. Regardless of the success or failure of the current bailout agreement, the European Union’s integration project will become more dysfunctional while there are few levers to effect change. The result is a lopsided monetary union with no economic parity among members and a strict political hierarchy—inevitably Greece or another debtor will refuse to continue and will opt for its own route outside the Eurozone.

 

German Hegemony

The negotiations in Brussels this past weekend highlight the division growing in Europe. The regional north-south divide remains strong, however Germany's extremely demanding position has threatened to split the traditional Franco-German alliance.

In previous iterations of the crisis, in 2010 and 2011, or in 2013, cooperation between Paris and Berlin was imperative for the EU to move forward. However Hollande’s declining legitimacy domestically, combined with a relative rise in Berlin’s position, has pushed the EU’s political center further away from Paris.

German hegemony in this situation, while strengthening its bargaining position opposite Greece, is evidence of a long-term decline in the EU’s own institutional development. The democratic-undemocratic duality of the EU ensures that Brussels’ institutions are too weak and ungainly to enact proper change while strong sovereigns dictate terms to fellow members without any checks on their underlying interest.

Berlin’s insistence that the agreement contain no haircut on Greek debt further emphasizes the country’s position in the union. Echoing the sentiments of several other northern European states’ perceptions, Merkel’s red line on the issue conflicts with reported IMF concerns that Greece’s debt is unsustainable and requires restructuring. Such an admission threatens to unravel this week’s deal before it has begun.

 

The Greece Deal

The deal struck Monday morning represents a humiliating defeat for PM Tsipras that does not solve the Greek question, or the Europe question, in the long-run. The contagion effect of a Greek collapse today is more contained among EU sovereigns than it was in 2011, but the flaws of the EU’s economic and political arrangement exacerbate systemic weaknesses in more consequential member states, e.g. Italy and Spain.

Greece’s debt is not sustainable under the current conditions, and the bailout program proffered by the EU does little to ensure Greece will be able to meet its obligations. The terms of the deal provide Greece with 86 billion Euros in loans, 35 billion Euros for investment, and a 50 billion Euros trust fund (financed by the further sale of Greek state-owned assets).

In return, Greece must enact harsh austerity measures. The first round of these measures will be voted on by the Greek parliament today and include: cutting public employment, increasing VAT tax rates, raising the retirement age, and allowing European monitors to oversee the bailout. After Greece approves these terms, the other 17 members of the Eurozone must also approve the bailout in their national parliaments.

More immediately, the issue of bridge financing to cover Greece’s upcoming payment of seven billion Euros to the ECB and IMF on the 20th of July further provides time for the deal to crash before finalization.

 

Implications

Germany is pursuing a policy that, supported by fellow hardline states like Finland or the Netherlands, exacts the highest price from Greece in terms of concessions. But Greece agreed to the terms, providing Berlin with plausible deniability as a driver of the crisis. The Greek government is now in a worse position: it must successfully implement the harshest austerity measures yet without the guarantee that its debt will be restructured.

Neighboring EU members like Spain or Italy with structural economic issues of their own recognize the systemic flaw in providing economically strong states disproportionate power. The next time Berlin tries to force a fellow member state’s hand, they may be unwilling to bend.

The deal represents a fractious decision for Greece, but also for the rest of Europe. Ultimately, the crisis remains unresolved. Berlin continues to hold the key to the purse while current policies in a suboptimal currency area will, without doubt, ensure that even relatively competitive states will face similar questions as Athens in the future and, now that the question of exiting the Euro is no longer taboo, are more likely to choose their own path.

 

 

Photo courtesy of Mick Baker/Flickr, some rights reserved