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Why Bail-out Is Not a Victory for Either Greece or Eurozone

For the time being the deal prevented Greece's exit from eurozone and endorsed the notion of a united European entity. But how long this can be sustained is a question that even the strongest empathisers of a collective European reality would want to conveniently skip.

Finally Greece and its European counterparts, led by Germany and France, reached a deal after a grueling, 17-hour round-table which will result in a third round of bail-out worth $95 billion, helping Prime Minister Alexis Tsipras' government to bank-roll the banks that have been closed since the beginning of June. Tsipras also managed to muster the backing of 229 MPs (against 64 who voted no) to pass legislature to go ahead with the bail-out plan dictated by Germans in exchange for harsh authority measures. For the novice, this may look like a victory--at least a momentary one for Greece and eurozone and a respite from prolonged uncertainty around the possibility of Greece's exit or Grexit from the eurozone. But is the bail-out a solution for the debt crisis that has been ravaging Greece and other European counterparts for years? The answer is not in the affirmative.

The Greek crisis raised its ugly head for the first time in 2009 when it admitted that it was burdened with debt amounting to 113 per cent of GDP - nearly double the eurozone limit of 60 per cent. The country's accounts were proved to be as good as fakes. Reforms were never fully implemented and paying taxes was a lifestyle choice. In January 2010, Greece's budget deficit in the preceding year was revised upwards to 12.7 per cent, from 3.7 per cent, and more than four times the maximum allowed by EU rules.

While the legislature endorsing the third and the harshest bailout in six years is passed comfortably, the country has to pay a heavy and almost unrealistically huge price--it has to implement VAT changes including a top rate of 23 per cent, abolish VAT discount of 30 per cent for Greek islands, raise corporate tax to 29 per cent for small companies, increase retirement age to 67 and sell off $55 billion worth of state assets, among other hostile measures. This will virtually break Greece's economy that has already shrunk by 25 per cent in the last five years amid austerity measures designed to curtail its ballooning debt.

While the previous rounds of negotiations with creditors forced Greece to stare into the abyss that is lying ahead, this round has literally pushed the country into the abyss--unemployment rate is already 26 per cent, tourism industry is battered as would-be visitors stay away and banks and the stock market have been closed for more than three weeks. This adds to the numbers that are depressingly bad--Greece has €320 billion in debt and its debt to gross domestic product ratio is above 180 per cent.

While the deal will keep Greece in the eurozone at least a while longer, the cost it has to pay is astronomically high. In exchange for a cash lifeline, the country has agreed to much greater concessions than those that were under discussion a few weeks ago. The shutdown of the banking system enabled Germany and its allies among creditor countries to demand more stringent austerity than had been on the table before the country went for a referendum on the bail-out.

The economic ramifications of the deal are going to be clearly debilitating. More austerity will play havoc on Greece's economy which started contracting again in late 2014 after having resumed growth earlier in the year. The need for hitting targets for government borrowing will require measures that are bound to create a further headwind for the economy. Also, higher taxes and spending cuts will dampen demand for goods and services, further pushing the economy to stagnancy and deceleration. However, the price the country has to pay on other fronts--social and political--is as humiliating as the economic consequence. Bleak prospects of economic recovery would push unemployment levels to new heights while pulling living standards further down. The country may also be forced to go through another round of elections. However, the most humiliating defeat revolves around the country's sovereignty--henceforth, its economic policies will be dictated by creditors.

Beyond the borders of Greece, the deal has exposed divisions among EU partner countries. While Germany and France happened on the same side at the end of the deal, the cracks between the biggies among European countries are clearly visible. On the one side Germany and its allies including the Netherlands, Austria, Slovakia, Belgium, Finland, Latvia and Lithuania, want Greece to exit eurozone, France, supported by Italy and Spain still clings to the fragile idea of Europe's solidarity. The drama before and after clinching the deal also reinforced the fact that an unambiguous possibility of a member nation exiting the eurozone--that appeared more clearer now than ever--is likely to encourage other economically weaker EU nations to more forcefully consider exit as a viable option that stooping to disown their sovereignty.

For the time being the deal prevented Greece's exit from eurozone and endorsed the notion of a united European entity. But how long this can be sustained is a question that even the strongest empathisers of a collective European reality would want to conveniently skip.

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