By ALEN MATTICH, Wall Street Journal
A deal was struck — with caveats – between Greece and its eurozone creditors on Friday. Whether or not it was a good one for Greece is the subject of some debate. What it doesn’t do, however, is resolve the eurozone’s fundamental problems.
Greece is being given another four months of breathing room as its bailout is extended beyond the previous deadline, the end of February. That’s subject to the Eurogroup of eurozone finance ministers accepting a reform program submitted by the Greek government.
Importantly for Greece’s Syriza government, the terms of the bailout isn’t merely an extension of the existing program. It can claim to have won some ground on austerity–the Eurogroup of eurozone finance ministers, who have been negotiating on behalf of Greece’s creditors, have given Syriza some flexibility on how large a budget surplus, excluding interest payments, it might be expected to deliver.
And although the Eurogroup didn’t give any ground on Greece’s total debt–Syriza had been calling for it to be forgiven in part–that’s a financial red herring. Previous arrangements mean that Greece’s interest payments only totaled some 2.6% of GDP in 2014, about half of Portugal’s rate and not much more than France’s 2.2%. Those interest payments will be less than 2% in 2015 thanks to falling interest rates, according to Bruegel, a Brussels-based economic think-tank.
Some economists, like Paul Krugman, argue that Syriza won an important victory and that it has a platform from which to wind back austerity further. Others don’t see that much has changed and that an eventual crisis has merely been put back by another four months.
Between now and then, the Greek government has some serious problems to work through, not least the fact that the tax take in January was 20% below forecast.
But even assuming there are no major stumbles and negotiations towards Greece’s next program progress more smoothly than they have done towards the current extension, Greece’s fundamental problem remains: the euro itself.
Greece it is in a currency union with radically different economies on different cycles. At a time that a quarter of working age Greeks are unemployed, Germany is at full employment.
Currencies usually exist to serve a single country, where fiscal transfers help to balance economic mini-cycles in different national regions. The closest the eurozone has come to these sorts of fiscal transfers is the current bailout regimes. Even then these transfers are only loans, albeit creditors quietly accept they’re unlikely ever to be paid back in full. Suffice it to say that this is a less than optimal way to organize an economy.
This is especially relevant as the German economy starts to fire on all cylinders. If the European Central Bank’s bond purchase program triggers a German boom–real estate prices are already picking up as are wages–German inflation could start to rise well before Greece recovers. Will the ECB then look to Germany or Greece when determining interest rate policy?
Leave rates too low and Germans will grow convinced that the ECB is determined to destroy the value of the euro. Hike too soon and Greece will slide back into depression.
The German popular press has frequently expressed distrust of Germany’s eurozone partners, not least Greece—some of which came out in the recent negotiations. One fear is that the single currency’s struggling economies will look to backslide on reforms and budget rules. For instance, Spain has managed to get approval during the past couple of years for some big government shortfalls as a means of kick-starting the economy. With Syriza having already won concessions on the size of surplus it’s expected to run this year, imagine German outrage if continued poor tax compliance meant that it failed to meet even relaxed thresholds.
On the other hand, the eurozone has been successful at rolling over existing problems to an indeterminate future date. ECB President Mario Draghi’s promise to do “whatever it takes” to keep the euro intact was hugely influential in pushing down government bond yields across the single currency region without the central bank actually having to do anything of substance—in part because the political will wasn’t yet there allowing the ECB to take the significant measures it has recently launched.
But pushing problems can only go so far. The very structure of the eurozone means that Greek exit is not an unlikely outcome sometime down the line. Quite when is another matter.
