I have been mulling over the terms of the agreement between Greece and the Eurogoup. Initially, I thought that Greece had ended up with an appalling deal, getting almost none of its aims and losing control of EFSF funding for its banks. The retention of future primary surplus targets under the November 2012 agreement - only the target for this year is under review - seemed particularly harsh.
But then I listened to Pierre Moscovici explaining the thinking behind the deal, and suddenly the penny dropped. We've all been missing the point. Holger Schmieding of Berenberg Bank was on the right lines - he commented recently that the real problem in the Greek negotiations was that trust had broken down. Indeed it has. But not recently. Trust in Greece broke down a long time ago.
The most obvious breakdown in trust happened in 2010 when the extent of Greece's indebtedness was revealed - and the lengths to which it had gone to conceal its true position. With the help of Goldman Sachs, it had lied about its finances to gain admission to the Euro in 2001, and had been living a lie ever since.
Since then, successive Greek governments have failed to deliver agreed reforms or have chosen to implement so-called "reforms" that wrecked small businesses and bankrupted households without addressing the deep structural problems in the Greek economy. Greece has made an immense reform effort, but all it has to show for it is a tiny primary surplus, some illusory exports and a growth mirage. It remains deeply depressed: the Economist observes that its depression is now nearly as deep as that of the US in the 1930s and more prolonged. And its debt/gdp is now a shocking 181% of GDP. However well-intentioned these reforms are, they are not working.
But in fact Greece has a long history of fiscal mismanagement. It has had recurrent defaults: some estimate that it has spent half of the last 200 years in default. It has also had episodes of high inflation and even hyperinflation, which is one reason why restoring the drachma is unpopular.
The long history of mismanagement, coupled with Greece's underhand behaviour when joining the Euro, are the reason for the breakdown in trust. Other countries simply do not trust Greece to do what is necessary to restore its economy and repay its debts.
Syriza appears to have assumed that it would automatically be trusted by other governments. After all, it is a new government with no connection to the previous ones. It doesn't have a record of financial and economic mismanagement. It does have some lefty ideas, such as raising pensions and minimum wages and restoring collective bargaining, but these could be accommodated within a fiscally austere budget. And that is exactly what it has proposed. Its rock-star economist finance minister Yanis Varoufakis planned to run fiscal surpluses of 1.5% indefinitely, which is hardly profligate, and make structural reforms to encourage business, remove distortions and improve tax revenues. He complained that the reforms imposed by previous governments under the aegis of the IMF, ECB and European Commission were not good enough and he wanted to see far more extensive and radical reforms. And he wanted to "bail in" creditors by replacing existing debt with nominal GDP linked bonds, which would not pay out until growth improved and would therefore give creditors a direct interest in ensuring Greece recovered. To those of us watching on the sidelines, this did not appear unreasonable.
But it did to EU member state governments, particularly in creditor countries and - perhaps surprisingly - in some other periphery countries. They rejected his ideas out of hand and insisted that he had to stick to the terms of the existing agreement. This seemed harsh, and I - like many others - thought that these governments should give his ideas consideration. But the governments were not objecting to the economics. No, their real problem was that this government is Greek, and they don't trust the Greeks.
In effect, Syriza said to the other EU governments, "We aren't like the others: just let us do what we want and we will deliver growth and debt reduction". To which the others responded, "We've heard it all before. Why should we believe you are any more capable of doing this than your predecessors?"
This, in a nutshell, was the obstacle. Syriza wanted a new arrangement in which the rest of the EU would trust it to deliver on its promises. The rest of the EU wanted Syriza to prove its trustworthiness by completing the current programme. Deadlock.
It is to the considerable credit of the three institutions involved in the negotiation that this deadlock was eventually broken and an agreement established that gave Syriza some freedom of action while reassuring governments that existing commitments would be met. Indeed it appears to me that the IMF, EC and ECB have been broadly supportive of the Greek argument that the present programme is not deliverable in its entirety and needs to be renegotiated, and because of this more has been conceded than might have been expected. In short, the eventual agreement gives Syriza as much as it could realistically hope for and more than it had any right to expect.
The agreement essentially wipes out the current reform programme for the next four months, replacing it with a programme of reforms that the Greek government will specify and the EC, ECB and IMF will collectively approve. In parallel with this, and subject to institutional approval of the Greek government's proposed reforms, the national governments will extend Greece's bailout program until June 2015 to enable it to meet essential commitments. Funding to Greek banks will continue to be provided by the Hellenic Central Bank under the ELA facility, and there will be no imposition of capital controls. The initial list of reforms has to be submitted for institutional approval on Monday 23rd February. It will probably go through several iterations before being approved, and there will be a lot of chewed fingernails, but once it is approved national parliaments will be asked to approve the bailout extension.
There will then be further work to specify the agreed reforms in detail. The details, including implementation plans, must be agreed by the end of April. This will then give time for further negotiation of what could be a completely new programme. And then we will play the cliff edge game all over again in June when the bailout extension runs out and the new programme must be approved in time for Greece to meet its debt obligations in July and August.
So although the Greek government didn't get debt relief, and it didn't get a commitment to reducing primary surpluses from 2016 onwards (this will have to be negotiated on the basis of revised forecasts taking into account the effect of the new reforms), it got something much more important - the opportunity to prove that it can be trusted.
I can't emphasise too strongly how important this is. I've observed before that the value of currencies depends on the credibility of their sovereigns. But Greece is a Euro member. It is essential that ALL Euro member states are credible. If one is not, then the rest are also undermined because of the risk to the currency that they all use, and indeed to the institutions, the banks, the trade links and the information channels that they all share. No wonder the other states needed reassurance that Greece would meet its commitments. It is not just a moral argument about obligations. Their own economic stability is on the line.
This chimes very well with a key demand of the Syriza government - the call for Greece's "dignity" to be restored. People who aren't trusted have no dignity. They cannot be left to do things for themselves, unsupervised, or to make decisions for themselves if those decisions will affect the welfare of others. So it is with countries, too. Syriza cannot have the trust of other EU members just because it says it should have it. It must earn it. This agreement, rather than treating it as a basket case that must be told what to do and supervised closely, offers it the opportunity to earn that trust by doing the following:
- creating a programme of credible and achievable reforms that will deliver the growth that Greece desperately needs
- delivering the reforms agreed with the supervising institutions
- meeting all of its existing commitments
That's the challenge to Syriza. I hope it is big enough to accept it. But there is also a challenge to the rest of the EU.
The approval and supervision of Greece's programme has been given to the three institutions involved, the European Commission, the ECB and the IMF. It is fair to say that none of these has handled Greece's difficult situation well in the last few years. The IMF was the first to recognise its failings, producing several pieces of research that identified deficiencies in its handling of the Eurozone crisis in general and Greece in particular. As time has gone on, it has looked increasingly uncomfortable with the harsh austerity imposed on Greece. The ECB, too, worried about the severe demand squeeze in much of the periphery, has been trying to find ways of reflating the Eurozone economy without breaking fiscal rules. And the latest to the party is the European Commission, which under the leadership of Jean-Claude Juncker appears to wish to soften the fiscal stance and increase investment. All three institutions are quietly supportive of Greece's argument that austerity is too severe and needs to be relaxed.
But some key member states are not so supportive. For them, austerity is something to be endured in the expectation that reforms will pay off and growth resume. Germany's Wolfgang Schaueble was criticised by many people, including me, for his uncompromising attitude. And there are features of the agreement that do seem to be particularly aimed at soothing frayed German nerves: at the press conference, Jeroen Dijsselbloem said the reason for transferring HFSF funds back to the EFSF was to ensure that they could only be used for recapitalising banks and not to shore up the sovereign finances, which was a key worry of the German delegation. The insistence that the November 2012 agreement must remain in place for the four months is also a concession to member states worried that removing the existing framework completely would give Greece carte blanche to reverse all the reforms it has made. Evidently the supervising institutions still have some work to do to win the trust of member states, too.
It is therefore a considerable concession for member states to relinquish their power of veto over Greece's reforms to three institutions that have a chequered history and now appear to have a somewhat softer approach than some member states would really like. And it subtly shifts the power balance within the EU, away from Germany-hegemon and towards institutions. Taken in conjunction with President Juncker's ideas about creating a Eurozone-level elected body, this seems to move the Eurozone further down the road towards fiscal and political union.
Both Greece and the EU institutions should therefore appreciate the sacrifice of sovereignty made by Germany and others in this agreement. And both Greece and the EU institutions bear responsibility for making sure that it works. The IMF does, too, but its involvement will be short-term: Christine Lagarde explicitly stated in the press conference that the IMF programme ends in March 2016, which is long before any new EU programme for Greece would complete. As the IMF steps back, the maturing EU institutions must pick up the reins.
As Schaueble put it in his post-agreement press conference, "in the end this is not about a particular country, it is about the EU". And it is the whole EU which will gain if this all turns out well.