The outline agreement between Greece and the other euro zone countries to extend its bailout programme is welcome, though it is just a first step. Before anything else happens, further negotiations will be needed over the next couple of days on a package of reforms put forward by Athens. There is still a risk of Friday’s agreement falling apart and further tensions between the two sides look certain.
If that deal is signed off , then a lot of further talking lies ahead. The EU Commission, IMF and ECB must judge whether Greece has succeeding in finishing its programme satisfactorily and then, if this hurdle is crossed, talks start on a new, third programme. Given the difficulty of reaching the compromise on a four-month extension, there is a huge job to be done for a longer term deal.
Last Friday’s deal offers Greece the possibility of some adjustment in its economic programme, but only through agreement with the troika, now be to renamed “the institutions”. Given that budget targets for 2015 have not been spelled out, it is not clear how much leeway the Syriza-led government will have, but it will be limited. In return, it has had to give significant ground, effectively agreeing to extend its existing programme.
The tactics of the new Greek government have been strange and, initially, won few allies around the table. Greece should get support. The austerity programme has not, as had been forecast, led to a revival in growth. There is a need for a realistic approach to its national debt burden, which remains too high at 175 per cent of GDP.
However, Greece is now in the position that its main creditors are not private investors, but rather other EU countries. Their reluctance to write off debt is because it would hurt their own exchequers. Greece needs to win their support. There is a possible deal in the months ahead, where Greece commits to a range of reforms – and starts to deliver on them – and Europe agrees a significant restructuring of Greece’s debt.
It is difficult territory because the new government’s approach is at variance with what many of the creditor countries feel is appropriate. This is why last week’s talks were so difficult and why there are likely to be more tensions before the extension is finally signed off. It is a chaotic and somewhat unsatisfactory process, but it is the way Europe works.
It remains to be seen whether middle ground can be found on what both sides judge to be realistic terms. The talks comes at a time when there is a growing realisation that the EU needs to boost growth.
Given the tensions of the past week, finding a wider agreement is not going to be easy. The first job, however, is to get the outline agreement reached on Friday fully delivered.