Greece, Europe Finally Reach Agreement – But Will It Stick?

Greece debt agreement

Greece and its creditors finally reached an agreement on Monday after a marathon negotiating session. Following a week of often contradictory events, Greece will remain in the euro but its government will have to pass a series of reform measures within the next week.

European Commission President Donald Tusk tweeted the news overnight.

The agreement does not guarantee a new bailout. Rather, it promises a new round of negotiations for a bailout if the Greek government accepts and implements all of the conditions of the deal. Other European governments will also have to vote on whether to move forward, German Chancellor Angela Merkel endorsed that path “with full conviction.” After days of twists and turns that laid bare the extent of distrust on both sides, Merkel also said that “the advantages far outweigh the disadvantages.”

If the new round of negotiations does happen, the parties will be hammering out the details of a third bailout in five years. One immediate positive for Greece is that with an agreement to discuss those details, the European Central Bank will likely have more flexibility to aid banks there. That should help alleviate some of the financial tightening that has crippled the country’s economy over the past few weeks.

But Greece’s parliament will be forced to pass several tough reform bills in order to qualify for the new round of negotiations, and thus what is expected to be more than 80 billion euros (or over $90 billion). The new bailout would include a three-year-plan to restructure its financial system and debt in a bid to put the country on surer long-term footing.

One of the most difficult pills to swallow for Greeks will likely be the provision creating a fund of around €50 billion, composed of proceeds from the sale of Greek-owned assets. What exactly that means, or what the fund could include, is unclear.

The weekend drama came after a sometimes confusing week, with contradictory events and what appeared to be brinksmanship on both sides. Days after the dramatic (and resounding) “No”-on-austerity vote, the Greek government, led by Prime Minister Alexis Tsipras, basically capitulated to European demands for more austerity in exchange for a new bailout. But then, within another few days, Europe appeared split on the way forward.

Speaking to an Italian newspaper on Sunday, Italian Prime Minister Matteo Renzi said, “Now common sense must prevail and an agreement must be reached. Italy does not want Greece to exit the euro and to Germany I say: enough is enough.”

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Germany and other northern European states showed little sympathy for Greece’s position. Word came over the weekend that Berlin was even floating a new possibility: temporary Grexit, where Greece would leave the euro for a time as a sort of trial separation so it could get its house in order. But as the Washington Post’s Matt O’Brien pointed out, this would have been temporary in name only. If Greece succeeds with its own currency, why would it want to return? And if it fails, why would the eurozone welcome it back?

Part of the problem with a Grexit is that it would have signaled to the rest of the eurozone members that the currency is neither as stable or permanent as once imagined. If one country leaves, what’s to stop any others? Britain, after all, has declined to join because its financial system is just fine with the pound.

One of the major causes of eurozone heartburn is the fact that each member country is both technically independent politically yet beholden to continental institutions like the European Central Bank for its monetary policy. That creates perverse situations like the one in Greece. Athens is ostensibly home to a sovereign government but it has little control over its economic and financial future. Moving toward a politically united Europe, more akin to the U.S. than the patchwork of institutions and agreements it is now, would likely help alleviate the perverse incentives the current system creates.

Instead, there seemed to be a growing perception that Germany was pushing too hard as it increased its demands after Athens appeared to capitulate. “Appeared to,” because the Greek government has failed to live up to promises in the past. That is partly to blame for the current crisis.

Still, some of the new demands have raised eyebrows. For example, Germany wants Greece to open stores on Sundays – even though Germany itself refuses to do that. As Matthew Yglesias explains, that position seems to put Berlin at odds with the rest of Europe and implicitly acknowledge that, yes, a Grexit would be preferred.

But after Monday’s agreement, and Merkel’s assertion that Greece would not be leaving the euro, the situation seems to have shifted once again. It would not be surprising if, after each country’s parliament debates the terms and votes, things take another turn.