The Greek bailout is almost ready to go, though it still faces parliamentary votes today in Germany and the Netherlands, the latter of which could conceivably cause difficulties. The final negotiations for the bailout programme have demonstrated two things clearly. First, the European Union has learned some lessons from the last few years, though the challenges facing the Greek programme are still enormous. Second, the political mood in the creditor countries has soured, with both the German and Dutch governments facing opposition to a new programme and strong political reservations also in Finland and in newer member states such as the Baltic countries.
The irony is that the EU has rewritten its bailout rules, but after a long recession, populations in both debtor and creditor countries are unhappy. For Greece, there is a question mark over the political and economic sustainability of austerity, unless there is a quick gain through debt relief. For the creditor countries, there is an impatience with Greece based on a mix of fact, fiction and emotion.
Apart from the economic challenges, this underlines the political challenge facing Europe’s leaders in persuading their populations of the long-term benefits of solidarity, despite the gains which euro membership has brought, notably to Germany. This does not augur well for the kind of further integration needed if the single currency is to be put on a stronger footing.
The terms on which the bailout was extended to Greece and the apparent willingness to consider significant extensions on existing debt at least indicate that some lessons have been learned. The terms on the new Greek loans, with average maturities of over 30 years and an interest rate of 1 per cent, stand in contrast to the initial terms imposed on Greece and Ireland during 2010, though in both cases terms were changed in time. There is at least a recognition that the focus should be on sustainability, not financial punishment.
The difficulty for Greece is that a range of new tax hikes and spending cuts will lower demand and hit growth, threatening to prolong recession and thus make future targets harder to hit. Debt relief will only answer this up to a point. Greece’s financial system is crippled and rescuing it will require both luck and generosity from the rest of Europe. Whether this will be politically possible in the years ahead – given the political mood in creditor countries – is very much open to question. So is the ability of any Greek government to deliver on the programme.
The EU has got its way through the crisis by a process of incremental change. The problem is that something more dramatic may be required to rescue Greece. Approving the Greek programme is only a start.