Politician will have to give way on many more issues to secure a place in the eurozone

By Simon Nixon, Wall Street Journal

Greece’s membership in the eurozone looked less precarious by the end of last week than it did at the beginning—but it still hangs in the balance.

Faced with escalating bank runs and rapidly deteriorating public finances, Athens finally bowed to the inevitable and did what it had vowed not to do: request an extension to the country’s current bailout program—and commit in good faith to completing it. In doing so, the new Greek government has averted certain economic collapse and bought itself time to break yet another promise as it tries to secure a new bailout.

Little was agreed upon at Friday night’s meeting of eurozone finance ministers that couldn’t have been agreed on the day the government took office. Athens invested the better part of a month in the pursuit of the legally as well as politically impossible fantasy of unconditional loans from the European Central Bank and eurozone taxpayers.

But it was always clear that the only pot of money available to cover Greece’s short-term funding needs was the bailout agreed upon in 2012 and due to expire on Feb. 28. Athens’s attempts to undo this deal were doomed to failure because any new arrangement would have to be ratified by a number of parliaments, including Germany’s Bundestag. The best that Greek Prime Minister Alexis Tsipras could salvage from his weeks of brinkmanship was an agreement that Athens be allowed to substitute some of the overhauls demanded by the troika of the European Commission, the ECB and the International Monetary Fund with proposals of its own. But these must still be settled with the troika—now renamed the institutions to spare Athens’s blushes—which will continue to monitor progress. Athens will also be granted some unspecified leeway over this year’s fiscal targets, inevitable given the toll that three months of crisis have taken on the public finances. But the reality is that the extension agreed upon by Mr. Tsipras is substantially the same as that agreed upon by his predecessor, Antonis Samaras, in December.

Even this isn’t a done deal. In fact, all that was agreed upon last week was that those countries that require parliamentary approval for a bailout extension will start the ratification process. When and if that process is completed depends on Greece reaching agreement with the troika on its reform commitments.

That is unlikely to be straightforward. Both the ECB and IMF have a legal obligation not to stray beyond their mandates. They insisted that Mr. Samaras fulfill the terms of the bailout last year because they judged that to relax their demands to ease the political pressure on him would constitute an inappropriate interference in Greek politics. It would be remarkable if either institution now decided to soften its approach to give a helping hand to Mr. Tsipras. 

Athens has until Monday evening to submit its overhauls. But unless it can display so-far-unseen reforming zeal, more brinkmanship may lie ahead. After all, Mr. Tsipras has pledged to drop the two big troika demands that sank Mr. Samaras: an overhaul of the value-added tax system and a further pension overhauls.

The troika believes that an overhaul of Greece’s loophole and exemption-ridden VAT system is an essential component of any serious crackdown on tax evasion and corruption, a goal Mr. Tsipras says he shares. The troika also considers the reform of a pension system in which 40% of those retiring last year were below the official retirement age as crucial to ensuring future debt sustainability. Mr. Tsipras will have to offer something meaningful in return.

Even if Greece gets its bailout extension this week, its problems are hardly over. Athens can’t draw on any loans until overhauls are delivered, which isn’t envisaged before April’s end—and then only if Mr. Tsipras can win Parliament’s backing for whatever he agrees upon with the troika. That can’t be taken for granted since a section of his party is well to the left even of him and Finance Minister Yanis Varoufakis.

Indeed, Mr. Tsipras and his party spent the past three years vigorously opposing most of the reforms under the current program, which he has had to promise not to reverse. Meanwhile, Athens could run out of money as soon as next month.

Athens and the eurozone will also need to start negotiations on a new bailout. This needs to be in place by the end of June to enable Greece to meet large debt repayments due in July and August. Eurozone politicians and officials warn that agreeing on a new deal could prove even more difficult than extending the current program. But there is very little room for maneuver between the eurozone’s red line of no reduction in nominal debt and Greece’s demand for looser fiscal policy. Even if the eurozone agrees to easier terms on Greece’s existing debts, it will be hard to put those debts on a downward trajectory if Athens runs smaller surpluses.

The task is complicated by the damage inflicted by the events of the past few months. The market access that the government, banks and corporate sector had started to regain last year is now lost and the banking system weakened by recent deposit flight.

The troika is unlikely to share the Greek government’s faith in a debt-fueled, consumption-led recovery and is likely instead to insist on further politically challenging liberalizing measures to encourage investment.

A successful negotiation will ultimately hinge as much on questions of trust as economics. As things stand, trust is in very short supply. Messrs. Tsipras and Varoufakis have spent much of the past month insulting potential allies, playing to the domestic gallery and stirring up hostility to Germany by reviving Nazi-era grievances.

Any time bought for Greece by an extension of the current program is also time bought for Messrs. Tsipras and Varoufakis to demonstrate they can make the transition to statesmen, becoming reliable counterparties whose word can be trusted and who are willing to respect the rules that underpin Europe’s single currency.

So far, this remains an open question. Mr. Tsipras has capitulated on many issues in the past week as he has met his date with political and economic reality. But he will have to capitulate on plenty more if he is serious about putting Greece’s place in the eurozone once again beyond doubt.