ECB-Greek Deal Pushes Debate Forward and Hides its Inner Problems

Europe has a deal and sighs a breath of relief – for now.

A four month extension is the final result of the intensive negotiations between Brussels and Athens, as both sides played a hard game of bluff poker during the last few weeks.

Although a deal seemed distant, the European Central Banks (ECB) and the Euro zone members agreed to an extension of its loan to the Greeks in exchange for new reforms in Greece.

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NEW REFORMS

Greece presents the list of reform ideas on Tuesday, in order to secure the 4-month extension. The list of changes is compiled by the Greek administration, contrary to the debt deal in 2012 when creditors imposed the reforms themselves. Combating tax evasion, corruption, an enlarged bureaucracy, bad loans, and an unchanged public sector are reform ideas that have been mentioned.

The extension and reform will need approval from among others the German parliament, Greek parliament, ECB, International Monetary Fund (IMF) and the European Commission. This process must then be ratified by the Euro zone member states.

HOT SUMMER IN EUROPE

Assuming the deal gets approval and is sealed in the first place, the next worrying aspect is that the extension itself has not solved the larger picture but only kicked down the can a mere 4 months.

The same issues will resurface a couple of months down the road when bigger Greek repayments are again needed in July and August (these payments have not been included in the extension). Already now the summer promises to become a hot one in Europe.

Some pundits declare the deal a victory for Germany whereas others proclaim Greece as the winner. Both sides draw some praise and some criticism at the same time. The Greek leaders have received criticism ultimately for agreeing to an extension, which was originally not part of their plan, and for accepting terms from their counterparties. Others claim Greeks the winner, citing that the longer the process takes the better it is for Greece.

DEBATE ANGLES

At the end of the day, the debate is about financial lenience versus financial stringency, implementing structural reform half heartedly or successfully, and geopolitics.

  • Creditors are not willing to reduce austerity programs whereas Greece advocates less financial stringency to allow more stimulus and economic growth. Greece and Germany, among others, have different opinions and cultural attitudes towards the solution of financial problems. This divergence is also noticeable in the German reluctance versus the ECB’s Quantitative Easing program (as well as Dutch, Austrian, and other Euro countries).
  • Whether the commitment to reforms really will lead to a more efficient and effective Greece will have to be seen. Whereas other Euro zone countries have managed to exit the bail-out program successfully, Greece does not seem to be even close to such and has been severely struggling.
  • The Euro zone is stronger now than it was a few years ago and many economists claim that the EU could handle a Greek exit from the Euro. However others indicate that EU needs to consider and include the geopolitical risk of Greece getting closer to Russia or China in the case of a Greek exit.

All in all… Draghi’s comments on Tuesday and Wednesday could shed more light on the matter. In general, although the storm has died down for now, the problems are far from over and the uncertainty regarding Greece will resurface soon.

A long-lasting deal will probably only occur when both sides are willing to negotiate and find each other ‘somewhere’ in the ‘middle’, most notably a Greek government that commits to structural reform and a Europe that is prepared to accept lower interest rates and longer maturity bonds (and perhaps a write-off of Greek debt).

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