Greek summer of 2015 – Breakthrough or waiting for Godot?

When Greece’s third bailout was agreed on in mid-August, it still awaited final approval by the German and Greek parliaments, both of which, although coming from opposite ends of the spectrum, knew they had no option. The deal is a cosmetically enhanced version of the one rejected in late June and grants access to €85bn with full recapitalisation of Greece’s banks by the end of this year and an immediate injection of €10bn into the banking sector. Germany was not directly involved, thus removing some of the acute tensions over the Greek debt crisis and in Athens, the newly appointed finance minister Euclid Tsakalotos has toned down the rhetoric and recriminations.

Although the financial markets are relieved, the situation remains unresolved. Ever since the Syriza party came to power in January, Greece has been careening from tragedy to farce to melodrama. A coalition of young and telegenic leaders, flanked by hardline former Communists and diehards of 1968, were convinced that they would have the support of left and Socialist parties across Europe to persuade the ‘Troika’ of the ECB, European Commission and IMF to reconsider the tough austerity measures in place since 2012.

Prime Minister Alexis Tsipras and the flamboyant Finance Minister Yanis Varoufskis demanded debt forgiveness in the name of historical guilt, the rolling back of austerity measures and oversight, but they sadly never offered a credible plan to reform the tax system, any move forward on the privatisation of state assets or pension and labour reforms. And unlike in 2011, when banks from across Europe and U.S. companies were overexposed to Greek sovereign debt, the risk of contagion across southern Europe was judged to be minimal, as Spain and Portugal slowly pulled out of the worst of their respective crises. More importantly, since mid-June, the value of the euro against other currencies has barely moved.

Both Germany’s Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble firmly believed that a “Grexit” from the eurozone was never a solution, but they could not fold unconditionally. After rejecting the June proposal and losing ECB backup, Greece had to revert to capital controls and close its banks. By this point, Tsipras’s early allies, Austria, Italy, France and Spain’s Podemos, were no longer willing to be so benevolent and flexible. Only France’s President François Hollande fulfilled an intermediary role between Greece and Germany.

Greece’s July 5 referendum, a last ditch effort Tsipras to prove that he could pressure the Troika into concessions, was presented as a noble stance to regain sovereignty and end the much-hated austerity measures. It proved to be an illusion. The initial reaction from the referendum’s ‘No’ result was exhilaration in Athens and dismay in global markets. But the images broadcast globally were of the poor and elderly weeping in the streets, begging at soup kitchens and queueing for hours to receive a few euros each day.

In mid-July, what euphoria there was ceded to reality when Tsipras accepted the final outline for a third bailout, negotiated in acrimonious conditions and largely similar to the original June deal only with a few concessions on the timeline and privatisation programme. After three weeks of hardship, the banks were reopened.

Unlike in 2010-2012, when Merkel and Draghi saved the day, this crisis produced no heroes, only the beleaguered and embittered. Mutual recriminations of German rigidity, Greek fecklessness and overall indifference tell only part of the story. The crisis revealed that the confrontation between sovereignty and supranational rules and regulations has not been resolved.

The European project was always immensely strong on historical necessity and political will, but unsteady on economic method. Without an exit clause, and even more precariously without a worst-case scenario strategy, an “orderly Grexit” (a comfort term for nervous markets) was never even a possibility. The great irony is that unlike extreme right and left factions uniting on virulent anti-EU platforms, none out of the Greek electorate, press or politicians ever wanted to leave the euro. As unemployment soared from 25% to 40%, the imposition of further economic shocks would only have worsened the country’s already deteriorating living conditions.

Greece has been on an infernal merry-go-round since 2010 of unsustainable debt, the inability to honour its commitments, emergency assistance dependent on adherence to stringent economic conditions, and political collapse, all leading back to a new round of negotiations and empty reform promises.

The end of August sees an interim government in place and plans for a new election on September 20. The ratio of debt to GDP ratio remains at 177% and the Troika and Greece are still stuck in an existential rut as each deal has promised resolutions that in reality are illusions.

Greece now needs to conduct a deep overhaul of the “safety net” economy, combining the French centre-left Mitterrand model from 1980s with a softer version of Germany’s “Hartz” labour market reforms under Schröder in 2002. These proposals, which will include raising the retirement age to fit new demographics, may be an anathema to the Syriza party, but must be considered. The next Greek government must also establish transparent guidelines and a realistic timetable for the privatisation of state assets and eliminating state subsidies and market distortions. The bureaucratic maze of regulations and restrictions on start-ups and SMEs must be simplified and unravelled, allowing them to expand and to export – specifically agricultural and artisan products.

The EU, meanwhile, must increase funding for education and training programmes at all levels of the labour market, reinstate and expand funding for cross-border exchanges and apprenticeships. Erasmus and Socrates models should be a priority, as an entire generation of educated young people face chronic unemployment.

As the IMF learned in the 1997 Asian financial crisis, “one size fits all” doesn’t work. Economic policies must instead incorporate political, historical and cultural determinants. New EU policies must be set on the criteria for emergency exit strategies. This was never a “euro crisis” but a deep crisis in the European project, and that is where reforms have to start.