The same economic package Greek voters so vehemently rejected just a week ago is back with a vengeance, this time with the support of their Prime Minister Alexis Tsipras.
Most likely, this is the best possible outcome for all parties involved, especially the Greeks.
The alternative would have been a disorderly exit of Greece from the Euro area (the so called “Grexit”). This would have led to high inflation, more fiscal profligacy, the collapse of the banking system, and ultimately a further impoverishment of middle and lower income Greeks.
There would be scope for celebration if it wasn’t for the damage that Tsipras’ adventurous negotiating strategy has caused to the European social construct.
Same conditions, a week after
The package of conditions on which Greece and other European countries agreed yesterday is remarkably similar to the package that was rejected in the Greek referendum of 5 July.
According to the Euro Summit statement from the European Council, Greek authorities have agreed to a first set of measures to be approved by the Parliament within the next 48 hours:
- Streamlining the VAT system and broadening the tax base to increase revenues
- Improving the long-term sustainability of the pension system
- Introducing quasi-automatic spending cuts in case of deviation from ambitious primary surplus targets
- Safeguarding the independence of the National Statistical Office
- Adopting a new Code of Civil procedure to accelerate the judicial process and reduce costs (to be approved by 22 July).
Subsequently, Greek authorities will need to:
- Carry out ambitious pension reforms
- Privatise the electricity transmission network
- Review and modernise collective bargaining institutions and align labour market policies with international and European best practices
- Strengthen banking governance and take decisive action on non-performing loans
- Develop a significantly scaled-up privatisation programme
- Reform public administration to reduce costs and increase its efficiency.
In exchange for that, Greece should receive between €82 and €86 billion, of which €7 billion by 20 July (when a repayment to the European Central Bank is due). Part of this package, for a total of up to €25 billion, may be used to constitute a buffer for the banking sector in order to address potential bank recapitalisation and resolution costs.
The language is different, the details are still a bit sketchy, but it is easy to recognise the many similarities between this list and the document that was rejected in the referendum.
So, Tsipras has taken Greece, and whole of Europe, through a new odyssey just to end up exactly where he had started. It is not surprising that many within his party are unhappy with this outcome and threaten to stop, or at least slow down, the approval of the first set of measures.
At the same time, what should the Greeks who voted no in the referendum think? Wasn’t the referendum supposed to reaffirm Greece’s sovereignty and to strengthen Tsipras position at the negotiation table? The mind goes back to Shakespeare and his Much Ado About Nothing.
The referendum did not help Tsipras and Greece to obtain a “better deal” with creditors simply because the deal on the table two weeks ago was already very reasonable. It did not involve any new austerity measures, but it only set some sensible requests to address structural weakness in Greek’s budget and public administration.
Making things even easier for Greece would have been impossible without creating serious issues of moral hazard.
New scars, a long way into the future
Not only did the referendum not improve Greece’s position in negotiations, it also contributed to creating new grievances and to alienating support for Greece in the rest of Europe.
By voting against the bail-out plan, Greek citizens (ill-advised by their government) sent a signal to the rest of Europe. Decoded, the signal sounded like “bail us out at no conditions”. A minority of Europeans might have fallen for the romantic idea of David fighting Goliath.
But the majority will now start wondering why their taxes should be used to rescue Greece if its citizens were unwilling to make a minimum effort to re-dress their own fiscal and financial situation.
The risk here is not the package being rejected by the Greek parliament or by a hypothetical new referendum in Greece.
The real risk is European citizens demanding to be given the possibility to vote on the question “are you willing to bail Greece out once more?”. A referendum like this could really put an end to European unification experience.
The loss of financial capital in this crisis has been considerable. But the greater cost, one to which Tsipras has significantly contributed with his tactics and rhetoric, is the destruction of social capital and the loss of trust upon which a community of States or Peoples is funded.
Unfortunately for the European “community”, this is a cost that nobody can bail out.
Fabrizio Carmignani receives funding from the Australian Research Council for a project on the estimation of the piecewise linear continuous model and its applications in macroeconomics..
Authors: The Conversation