How Likely Is the Greek Bailout Strategy to Succeed?

Tue, Feb 24, 2015 - 8:01am

Greece and its Eurozone partners agreed an 11th hour deal on February 20th to extend the country’s bailout for four months, setting up another potential standoff in June when a 3.5 billion Euro debt payment comes due. Negotiations led by Eurogroup President Jeroen Dijsselbloem produced a joint communiqué on the extension of the Greek bailout.

The deal allows for a four-month extension of the current bailout but leaves open what economic reforms Athens must implement. Those were be agreed between Athens and EU officials on Monday the 23rd.

Overall, Greece landed some positive agreements:

  • The deal allows the government to run a low fiscal surplus of 1.5% and not the 3-4% that Germany wants;
  • The word “bridge” appears in the document. The Eurogroup has indicated that it would be a bridge to any future arrangement, and in that sense overcomes the German opposition to the possibility of a transition program;
  • No new budget cuts;
  • Common agreement on new measures and program monitoring.

On the other hand, Greece lost out on policy independence:

  • Funds available in the Hellenic Financial Stability Fund (HFSF) will be held by the EFSF (the Eurozone’s bailout fund) and can only be used for bank recapitalization.
  • The Greek Government’s proposed social welfare policies would be subject to the approval of institutions like the IMF and the EU.

Friday’s deal indicates two things: firstly, it reveals the German government’s strategy in dealing with Greek demands for a rollback of austerity. Secondly, it shows Greece’s current and future strategy in response to the German strategy. Both strategies were shaped by the major events that led up to Friday’s deal and Angela Merkel’s leadership style.

Greece’s Position After National Elections

Let us begin with the Greek government’s main pre-election positions. That position included a write-off of one third of Greece’s debt, no extension of the current bailout and a balanced budget. SYRIZA eventually retreated from all three positions.

Yanis Varoufakis, the Greek finance minister, first abandoned the demand for a debt write-off on February 5th. The current bailout was extended, but without its austerity terms, while balanced budgets were replaced with low budget surpluses of 1.5%. Moreover, instead of pledging to raise the minimum wage immediately as SYRIZA promised before the elections, Greek labor minister Panos Skourletis stated that the government will “gradually” raise the minimum wage to avoid a “shock” in the labor market.

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What about Greece’s creditors? As expected, they have been adamant in their stance towards debt write-offs, extensions of the bailout and budget surpluses as well as so-called “unilateral measures” (i.e welfare spending) that would jeopardize Greece’s fiscal targets.

However, Greece’s opponents retreated on a number of issues. Why? The EU has kept up the pressure on Greece, as highlighted by the European Central Bank’s decision on February 4th to tighten liquidity provisions on the country’s banks. But things changed in the week leading up to the February 20th, following a number of events.

First, Greek Premier Alexis Tsipras decided not to propose the Greek European Commissioner for Migration, Home Affairs and Citizenship as President of the Republic, since Commission President Jean-Claude Junker did not want that. Mr. Tsipras conceded, but he asked Mr. Junker for a deal by Friday. This is why Junker said on February 18th that he is working to “achieve an extension of the existing program in order to bridge the time until summer.”

[Read: Greenspan: Greece Exit Only a “Matter of Time”]

During the same week, Mr. Tsipras had a telephone call with Chancellor Angela Merkel that he described as “constructive.” Greek finance minister Varoufakis stated very clearly that Greece had gone “an extra 10 miles”, adding that it was now the turn of his 18 eurozone counterparts to reach an agreement. These events eventually led Angela Merkel’s spokesperson to state on February 20th that the Greek request for an extension is “a good signal which allows us to continue to negotiate.”

What is the EU officials’ strategy? Firstly, it seems that the EU was keeping a hardline stance until the 11th hour to maximize its bargaining leverage. Secondly, it was testing how much the Greeks were willing concede. This is a delaying tactic that defines Angela Merkel’s leadership style. Since the election of the new Greek government, Germany has been buying time to see how far the Greeks were willing to compromise. As soon as Mr. Varoufakis sent his ultimatum, Germany backed off.

Greece’s Strategy Plays on Elements of EU

The last point brings us to the Greek strategy. The Greeks seem to be willing to negotiate on debt but have drawn a red line on the issue of austerity.

The deal that was struck on Sunday, however, leaves open the possibility of both budget cuts and a growth plan. Consequently, it is another indication of Merkel’s delaying tactic, which not only delays unpopular measures until the last minute (i.e. the concessions to Greece) but also postpones other measures for a later date if they are politically too unacceptable (i.e. cancellation of austerity).

Can we predict whether the Greek strategy will work? Athens has raised expectations too high so they are not going to retreat on fundamental promises. Given that Germany wants Greece in the Eurozone, it is likely that they will eventually have to retreat. One thing is certain: The struggle has only just begun.

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