Meet Greece Halfway, Europe

620x349

IN HIS HANDS LIES THE FUTURE OF EUROPE. MAYBE. PHOTOGRAPHER: CARSTEN KOALL

EUROPEAN ECONOMY

63 FEB 11, 2015 12:01 AM EST
By The Editors published at Bloombergview.com
Tonight Greece’s new finance minister, Yanis Varoufakis, is scheduled to make a proposal to his European Union counterparts. The importance of this negotiation would be hard to exaggerate: At stake is the future of the euro system.

The details of Greece’s new offer on fiscal policy and debt will matter — but not as much as a willingness on both sides to come to terms. So far, there’s been too little sign of that. Greece and the rest of the EU have been talking as though Greece’s exit from the euro system was an option they were willing to consider. That is a reckless message to send to investors.

Varoufakis continues to insist that Greece cannot and will not abide by the terms of the bailout program agreed to by the previous Greek government. When the program expires at the end of this month, Greece will refuse to extend it. Varoufakis wants a bridge loan while talks take place on the consolidation of Greece’s enormous external debts. So far, the rest of the euro area has said, “No way.”

Greece’s Fiscal Odyssey

Greece’s initial position deserved a stone-faced response because it seemed to allow for no compromise: Greece’s debts would have to be partly written off, whether Europe liked it or not. But on his tour of EU capitals last week, Varoufakis climbed a long way down from that. He now says Greece wants not outright forgiveness but further debt restructuring, including a swap into debts with repayment linked to growth rates. Rather than refusing to have policy conditions tied to the new deal, he’s indicating that many of the reforms bundled into the existing bailout program will stay in place, together with some new ones.

These proposals aren’t as bad as the initial pitch would have led you to expect. Actually, they make a lot of sense. The existing bailout program is widely recognized to have failed: It imposed too much austerity, flattened the economy and, as a result, failed to get the ratio of debt to national income under control. Right or wrong, Greece’s modified position should be seen, at the very least, as a basis for negotiation.

Yet some EU governments, and Germany’s especially, are refusing to budge. There’s nothing to talk about, they say. On Tuesday, German Finance Minister Wolfgang Schaeuble ominously pronounced that if Greece doesn’t want the final tranche of the bailout program, “it’s over.” Greece’s creditors “can’t negotiate about something new,” he added.

Why on earth not? Missed targets, failed programs and renegotiated agreements aren’t exactly unheard of in the EU: A cynic might call that sequence standard operating procedure. It seems perverse bordering on deranged to try to break this habit at the very moment when a sudden commitment to unwavering rigidity threatens the survival of the euro system.

Taken at his word, Schaeuble is telling Greece that nothing short of unconditional surrender will do. What are Greek voters, rallying behind their new government, to make of that? If Greece declines Germany’s offer of national humiliation, and the other EU governments follow through on Schaeuble’s threat, Greece will have no recourse but to default and, in all likelihood, to impose capital controls as a prelude to exit from the euro system. EU creditors will be worse off than if they’d come to an accommodation — and possibly much worse off, if the collateral damage from a Greek exit can’t be contained.

Greece has given some ground. Perhaps it needs to give some more. But it has shed its initial ill-advised aggression and is asking to make a deal. The EU needs to respond. If it refuses to, and the euro system fails as a result, it will have some explaining to do.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s