24 July 2015
EU leaders must take pragmatic steps to make sure this third Greek bailout succeeds. There will be no appetite to try again.
Evangelos Liaras

Dr Evangelos Liaras

Academy Associate


European Commission President Jean-Claude Juncker speaks with Greek Prime Minister Alexis Tsipras at the European Council in Brussels on 23 April 2015. Photo by Getty Images.
European Commission President Jean-Claude Juncker speaks with Greek Prime Minister Alexis Tsipras at the European Council in Brussels on 23 April 2015. Photo by Getty Images.


The relief brought by the deal between Greece and its creditors - and its preliminary approval by the Greek and other European parliaments - goes without saying. But the events of the last few weeks have demonstrated fatigue; Europe is tired of Greece and Greece is tired of austerity and never-ending recession. There is no denying that Greek political culture has a lot to do with the country’s predicament. However, this has also been a collective, European, failure. Some self-criticism among the creditor institutions would help tremendously to finally get things right.

The previous bailouts succeeded in saving the European banks but failed to get the Greek economy back on track. Despite having made the most dramatic fiscal adjustment among OECD countries, Greece is in a worse situation today than it was in 2010. The country is still stuck in a vicious circle in which budget cuts cause recession which then prompts creditors to require further cuts to balance the books. The recession in Greece is somewhat different from that experienced in other countries in that it has been cumulatively more profound (than in Spain or Portugal) and more protracted (than in Latvia, which experienced a deep slump but managed to come out of it faster). The financial institutions overseeing Greece’s bailouts were wrong in their predictions about the recession’s depth and duration. They were also too slow to acknowledge their mistakes and adjust their recommendations; the IMF’s public admission that Greece’s debt is unsustainable came only after negotiations broke down just before the 30 June deadline.

On top of the social exasperation caused by the recession, Greece has been the only country constantly facing the threat of exit—or rather implicit expulsion—from the eurozone. This threat has been sustained by the creditors over the last few years as a means of pressuring Greek governments to comply. It has completely backfired, scaring off investment and making economic recovery even harder. The threat of Grexit thus became self-reinforcing and European taxpayers are now paying the price of the harsh rhetoric of their own media and politicians towards Greece.

Greece’s creditors should have foreseen the political fallout from such a drawn-out recession. They should have been particularly wary of the economic consequences of governmental instability in a country notorious for high budget deficits in election years. Instead, European politicians have been all too keen to see Greek prime ministers go, somehow hoping to see them replaced by more compliant ones. This happened with George Papandreou (who resigned in 2011 after proposing a referendum on the bailout), Antonis Samaras (who called early elections in December 2014), and it almost happened to Alexis Tsipras this month (it is an open secret many European leaders would have liked him to resign). Structural reforms require broad political consensus; they will falter if they are seen as a purely imposed project. The pronouncements by EU officials and leaders—for example, attempting to frame the recent referendum as a vote on whether to stay in the euro, or even in the EU—have  been counterproductive, only adding to the sense of indignation and frustration that many Greeks feel. Fortunately, Greek democracy has proven resilient, but for a country struggling with the rise of Neo-Nazism and a 1930s-style depression, it is reckless for Brussels to be adding fuel to the fire, clumsily undermining Greece’s European identity.

There are alternative ways to move forward. Budget cuts, VAT rises, and capital controls in the midst of tourist season will only make the Greek economy shrink further this year; the creditors must put more emphasis on substantive structural reforms, such as improving tax collection and making the domestic market more competitive. The agreement went a long way in offering medium-term financing for three years; this must be complemented by promoting government stability—fomenting tensions within Syriza will just produce another government collapse and snap elections that will derail state finances. Finally, rhetoric that signals commitment to Greece’s place in the eurozone will go a long way towards building market trust and will have much greater financial impact than any single budget cut or pro-business reform.

European governments must not forget that they share a common goal with the Greek government: to return Greece to growth. After letting their publics believe that Greeks deserve to be shown the door for voting ‘no’, leaders in Northern Europe will have a hard time selling domestically the debt restructuring now deemed necessary by the IMF. This is a hole they dug themselves. The success of the third bailout depends not just on Greek leaders taking difficult decisions but on those outside Greece rising to the occasion. Unless Greece’s debt is made sustainable, this bailout agreement will not end up any better than the previous ones.

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