Fingers crossed: Greece’s third bailout since 2009 seems settled - but without debt relief how long is it likely to work?


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The Independent Online

Is it time to declare the great Greek debt saga over? The temptation is there. It has been a seemingly unending crisis, punctuated by summits, crisis summits, riots, elections, referendums, bank closures and an unprecedented opportunity for the world’s financial journalists to top up their tans. The European public, understandably uninterested in the detail, looked on in pity, dismay and fear. The net effect has been to discredit the whole European project, as well as inflicting real hurt on innocent, ordinary Greeks. It would be nice to think the nightmare was, at last, over.

Yet the €86bn bailout the Greeks have now formally agreed with the European Union – in reality the Germans – is unlikely to stick. For one thing, history suggests it will fail. Greece has had two previous enormous bailouts, and neither worked, while the modern Greek nation’s near 200-year history has featured many previous defaults. No one would fall off their chair at the news that Greece’s latest bailout didn’t work.

Second, the political will of the Greek establishment and voting public to implement agreed reforms in return for the bailout is doubtful. The success of Syriza, and the initial negative referendum result on the rescue, clearly demonstrates that the Greek public will simply not accept austerity and reform, even if the Greek parliament agrees, in principle. In that vote, Syriza split and the deal was carried only with the support of opposition MPs. Votes on painful individual measures could easily go the wrong way in the coming months.

Which raises the third point: there is no sanction for Greek failure, deliberate or accidental. How can there be, if all that means is piling more debt on to Greece’s shoulders?

Still, the plan is sound, if it could be made to work. It was apparent long before the crisis that the Greek economy is in need of radical reform. It is simply not productive or internationally competitive enough, and has few real engines of growth to maintain its living standards and honour its international obligations.

The measures needed are familiar to all failing economies that have been through this process, including Britain’s. Restructuring the labour market; slimming and making more efficient the Greek state; privatisation of industries; ending corruption; eradicating tax evasion; funding pensions properly, and so on. Any of these would be difficult to see through for a Greek government that believed in them – which Syriza does not.

Such are the politics of this deal; as crucial are the economics of it. The Greek debt mountain remains as large as ever – pushing 200 per cent of GDP. Contrast that with the British one, supposedly near unmanageable, at 80 per cent of national income. Even with a general global economic recovery – looking less likely as China stumbles – Greece would find it hard to grow out of its problems, given the burden of servicing that debt. The answer is so-called debt forgiveness, which in effect means that Greece’s creditors accept they will never see their money again. This is the standard IMF approach to reviving Highly Indebted Poorer Countries in the developing world. Greece too would benefit, because it cannot devalue its own currency, having given it up to join the euro, and, thus, its debts cannot be inflated away (the British way of doing things).

Yet writing off Greek debt carries the huge moral hazard that every other indebted eurozone nation will be looking for similar relief.   In Spain and Portugal, both with elections this year, the population would be given the signal that voting for a Syriza-style party means an end to cuts. That conundrum is the central flaw in the latest bailout plan and, indeed, the central flaw in the eurozone system.