Welcome to the GN Debate where two leading opinion writers go head to head on the issue of the day. For the opposing view to this column - why the Greek bail out was a bad idea altogether - go here.
The Greek deal was essential for Greece and it was a victory for Europe. Greece needs the stability of the euro and it is very significant that it remains a committed member of both the Eurozone and the European Union (EU) despite the attacks on its national politics. For their part, the leaders of the Eurozone needed to prove they have the political maturity to find a way to keep the euro working in its biggest challenge since the existential crisis of 2011.
An exit of a founding member would have been a dangerous tragedy for the euro because it would allow the markets to speculate that other weak countries could also be forced out of the currency when the next downturn comes, putting huge risks on small countries like Portugal or Ireland and even large ones like Spain and Italy.
The Eurozone has always been based on a political dream of encouraging closer alignment within the member states of the EU, but it suffered from a fundamental weakness as a currency union (one currency) with no fiscal union (same tax, pension and other rules) that the 2011 crisis cruelly exposed when the member states have to find a way to deal with the challenge.
The Greek deal showed that there was still enough will on all sides to continue to save the currency and this is why the political victory was so important. The euro was built on politics and it needs the complete commitment of its members to allow it to work.
The danger to the euro was not in the details of the Greek debt, but that the Greek and German political philosophies were in direct conflict, which exposed the inadequate structural mechanisms to manage the currency. The argument over the debt was never a discussion over the numbers because more money can always be found and debts can always be renegotiated. The negotiations got so desperate because there was a clash between different political philosophies which was only narrowly resolved.
Better deal
In fact the deal should have been more generous and should have written off enough of Greece’s debts to allow the Greek economy to recover its traditional vigour and generate enough growth to allow the government to repay its debts more quickly. There is a danger that the harshness of the current cure will kill the patient, which would serve no-one.
The International Monetary Fund (IMF) has issued a report that says the level of Greek debt is highly unsustainable, with a financing need till the end of 2018 at €85 billion (Dh338.87 billion) and debt is expected to peak at close to 200 per cent of gross domestic product (GDP) in the next two years. “Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far,” said the IMF, as it recommended a 30 year debt moratorium.
Therefore it is very likely that Greece will be back in a year or so to seek a debt holiday, which the rest of Europe will be able to consider more naturally if the unfortunate socialist Prime Minister Alexis Tsipras has succeeded in forcing harsh monetarist measures onto his people, thus gaining international credibility that he can deliver reform.
Euro’s future
Although the deal was heavily weighted in the creditors’ favour, it is nonetheless welcome proof that two radically different philosophies on how the Eurozone should be managed can work together. The Germans have dominated with a view that austerity, cutting government spending and paying off debts is the only route to solve Greece’s problems. Many others like the French and Italians disagree that this is the only way to restart the Greek economy and have argued that easier access to new money should be part of the package, which they would also like to apply to the usual workings of the Eurozone. The agreements over Greece have polarised the Eurozone members just as they are about to enter a vital year or two of debate on how to reform the euro and build it into a more robust currency, which will require much closer economic and fiscal policies of Eurozone members, and a much stronger European Central Bank. Without such a move to a strong euro it is hard to see how the currency will survive the next crisis.
The events of the past week got very heated with the Greeks comparing the Germans to Nazis, and German Finance Minster Wolfgang Schauble going so far as to suggest that Greece should leave the euro temporarily.
Germany and its loyalists like the Netherlands and Austria were pitted against others like France, Italy and Spain which have suffered under the German-led euro and will want to rebuild it into a more genuine currency under which regional adjustments are not a gift of the rich but a right of any requiring them. This debate will continue for many years as the euro seeks to redefine itself yet again.
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