Greek rescue is not the end of the story - Views

After weeks of brinkmanship, bad blood and missed deadlines, a Greek debt deal may finally be within reach. European finance ministers are meeting to decide whether to approve a €130 billion ($170.9 billion) bailout package designed to bring Greece’s debt down to 120% of GDP by 2020.

At times in recent days, a deal had seemed impossible, given the near complete collapse in euro zone trust in the Greek political class in general and opposition leader—and likely next prime minister—Antonis Samaras in particular. Even now, a deal remains conditional on Greece agreeing to further humiliating sacrifices of sovereignty with bailout money ring-fenced to prioritize payment of debt interest and the euro zone given enhanced powers of scrutiny over Greek affairs. But a deal will be a relief for Greece, the euro zone and the markets: A hard default would almost certainly lead to Greece leaving the euro zone with unknowable but potentially catastrophic circumstances. The bailout depends on Athens successfully securing about €100 billion of debt relief from private sector bondholders, whether through a voluntary deal or the triggering of collective action clauses that will need to be retrospectively attached to the bonds. Greece also still has to comply with about many more than 20 outstanding conditions under its previous €110 billion bailout.

The market rally since last December owes as much to cautious optimism that the euro zone is finally developing a coherent political response to the crisis as to decisive action by the European Central Bank (ECB). Investors are betting that the changes of government in Italy and Spain and the creation of a fiscal pact has created the political space for the deeper political and fiscal integration needed to end the crisis. If policymakers instead interpret this relief as evidence that their work is done and back off further reforms, the markets will wreak a terrible vengeance. That is because few believe a bailout that leaves Greece with a debt burden equivalent to 120% of GDP is likely to work.

The perception that this bailout won’t work is toxic since it means Greece’s membership of the euro remains an open question. Following the latest deal, the private sector will hold just 30% of Greek government debt, all of it under UK law, limiting the prospects for further debt relief. That suggests any future losses will fall on euro zone taxpayers, a far harder sell politically that could fuel demands for Greece to be kicked out of the euro. Who will trade with Greece with that threat hanging over it? Who will provide the investment vital to creating new jobs and growth?

The crisis has unleashed powerful and deeply unattractive forces across the continent, reflected in rising support for extremist fringe parties.

At the same time, increasing risk aversion among banks, investors and corporations threatens to pull the euro zone apart by stealth as cross-border flows of capital and trade seize up.

Only a powerful demonstration of collective political action can reverse these trends. Easing the bailout terms for Portugal and Ireland, in recognition of compliance with their austerity programmes, would send a signal that the euro zone understands the importance of carrot as well as stick. The European Union must also urgently deepen the single market, including forging ahead with moves to liberalize energy markets and the services sector and reforming the common agricultural policy. And it should expand the European Investment Bank and boost its structural funds to finance a genuine Marshall plan for Greece and other peripheral countries.

Finally, the euro zone needs to acknowledge that there can be no solution to the euro crisis until the fate of its banking system is separated from that of its sovereigns. That will require the creation of pan-European deposit insurance and ultimately euro bonds to provide banks with an alternative risk-free asset.

To go ahead with a flawed Greek bailout without a plan to accelerate euro zone integration and create a functional monetary union would be an act of calculated cynicism that would simply deepen Greek—and European—agony.

Edited excerpts. Comments are welcome at otherviews@livemint.com