The $172 billion Greek bailout package hammered out in Brussels Tuesday averts a looming Greek default and, its architects hope, will ward off dangerous financial consequences for neighbors.
The sheer size of the bailout and a promised debt write-off of roughly 100 billion euros ($132 billion) represents a more favorable outcome than Greek officials expected. But the bailout comes with rigorous budget cuts demanded by northern European states and other requirements that represent an unprecedented amount of European Union control over a sovereign member.
"We have been learning for years how to share sovereignty in Europe," says Loukas Tsoukalis of the University of Athens and head of the think tank Eliamep, which deals with European and foreign policy. "With the crisis, we are all being asked to take some difficult steps further. It is uncharted territory. If you are a country on the verge of default, such as Greece, sovereignty and economic survival may create awkward tradeoffs."
The terms are similar to conditions the International Monetary Fund imposed in the past on countries accepting loans, seen as a means of forcing economic reform. However, unlike those countries, Greece as part of a currency union cannot devalue its currency -- something that helped set the stage for renewed economic growth in previous bailout recipients.
The Greek government that took over last fall says it is committed to meeting the bailout conditions.
With a deadline to repay 14.5 billion euros in March, Greek Prime Minister Lucas Papademos and Finance Minister Evangelos Venizelos described the bailout agreement, reached after 13 hours of overnight negotiations that ended Tuesday morning, as historic, allowing Greece to avoid “a nightmare scenario.”
Yet with strikes planned in Athens today and public opinion on spending cuts ranging from resignation to fury it's unclear whether the Balkan state can deliver on its promises and restore the kind of economic growth needed to meet its budget targets.
"There's a serious contradiction among the people," says Charalambous Tsardanidis, director of International Economic Relations in Athens. "Greeks accept and insist on staying in the eurozone. They don't want a return to the drachma. All polls show this. But with the same majority, we don't see the austerity programs as an answer. After all the austerity, we still don't see an answer. We need to see development, jobs, building highways -- but that's not what the bailout deal is concerned with."
Greek unemployment is 20 percent, citizens have lost a quarter of their income in the past four years, and removed an estimated 60 billion euros from local banks, fearing their collapse. Yesterday Mr. Venizelos pled with the population to return their savings to Greek banks.
Antonis Samaras of the center-right New Democracy party and a leading contender for prime minister in upcoming April elections, said the debt reduction targets – to 120.5 percent of GDP by 2020 from 160 percent last year – could only be met with stimulus, not austerity. "Without the rebound and growth of the economy ... not even the immediate fiscal targets can be met, nor can the debt become sustainable in the long-term," Mr. Samasas said.
For debt as a percentage of the country's GDP to decline, the economy has to at least remain stagnant as spending is cut – but austerity makes it more likely the economy will contract.
Eurozone is home
European leaders yesterday described the bailout as ensuring Greece’s continued place in the eurozone.
Yet they have tried to “ring fence” Greece, treating it as a special case in hopes of buying themselves time to address the debt problems of states like Italy and Spain – the No. 3 and No. 4 largest eurozone economies – whose economic health is much more critical to the eurozone as a whole.
Swedish Finance Minister Anders Borg called the deal a “meaningful step forward” but said the Greeks were still “stuck in their tragedy; this is a new act in a long drama… I do think we've reduced the Greek problem to just a Greek problem. It is no longer a threat to the recovery in all of Europe."
As part of the bailout deal, Greece has accepted a permanent monitoring presence from the European Commission in Athens, the creation of a “segregated” escrow account that will require bailout funds to be used to pay back debt before it can be used for government spending, and requirements that it slash the government workforce, reduce pension payments, raise taxes and cut the minimum wage.
“Will the Greeks be able to meet any of the bailout terms?” asks Philip Whyte of the Center for European Reform in London. “There’s been two years of fiscal austerity followed by more fiscal austerity and then more fiscal austerity… . For Greece, this has so far been a self-defeating prescription with ongoing constriction.”
An analysis of Greece's ability to meet the debt reduction goal prepared by some of the country's creditors paints a grim picture. The report was provided to Reuters and other news outlets yesterday. It predicts that Greece will need another 50 billion euros in the coming years and casts aspersions over the country's ability to meet the debt reduction goals set yesterday.
"Given the risks, the Greek program may thus remain accident-prone, with questions about sustainability hanging over it," the nine-page report says, according to Reuters.
“Even if Greece had been conducting a radical overhaul of its labor market, its economy would still be constricting,” Mr. Whyte says. “My worry is that fiscal austerity will end up killing the faith that is now being shown in political circles to make the reforms that are part of the agreement.”
This week's meeting was, according to most counts, the 19th meeting of EU officials to address the eurozone's debt crisis, which has toppled five governments and prompted bailouts of Ireland, Portugal, and Greece.