It should never have come to this. The handling of the Greek debt crisis does not reflect well on either side of the negotiating table. Taking a longer-term perspective, it is clear that the two previous bailout programmes – agreed in 2010 and 2012 – missed opportunities to make Greece’s national debt more sustainable. And they were based on overly optimistic economic forecasts which did not take into account the costs of austerity. Greece did cut its deficit, but growth collapsed and wider economic reforms have been slow.
Following the election of the Syriza-led government, a lengthy stand-off has developed which has damaged the Greek economy and its financial system. During this, the Tsipras administration did little to build bridges or engage in meaningful talks, while the response of the rest of Europe and the three institutions – the EU Commission, the ECB and the IMF – has lacked coherence and been too slow to admit past mistakes.
The start of what appears to be a real engagement, at the eleventh hour, is welcome, but carries real dangers. If a deal cannot be agreed, either because of difficulties in negotiations or political opposition in Greece, then there is no time now to broker compromises. As ever, the real talking is done on the edge of the abyss.
If there was a wider strategic decision by the Greek negotiators to push this all to the last minute, it has been a miscalculation resulting, in particular, in a dangerous and potentially destabilising withdrawal of deposits from the Greek banking system. Meanwhile, senior politicians across Europe may well be mistaken in their assessment that a Greek exit is in some way “manageable” without significant costs to the rest of Europe. And it would certainly mean an enormous drop in living standards for the Greek people along with significant economic, political and financial uncertainty.
A deal to release the final phase of the second bailout programme is now urgently required,as is some template for talks on a third programme. Greece’s debt repayment terms are already favourable, but in the long term its debt burden remains too high. Better to face this through a negotiated programme than a chaotic default, and to build a new programme on reasonable financial foundations.
The Greek crisis raises more fundamental issues about the euro zone and its future. But for the moment the issue at hand is the immediate one of saving Greece and its people from the chaos of default and the risk of financial collapse. While it may not feel that supporting a reasonable solution suits its own domestic political agenda, the Government should realise the risks a Greek exit would bring for the wider European economy and for peripheral countries like Ireland. A deal is now urgently required.