An agreement was reached on a $170 billion Greek bailout last night. The deal — the second one — is meant to buy some time for Greece to fix its financial crisis and hopefully signals to the world that a Greek default — and its possibly disastrous consequences — will be forestalled, at least for now.
However, I haven’t yet read any account that makes me think that this deal will change anything. In fact, the Financial Times reports today that analysts from the European Central Bank, the International Monetary Fund, and the European Commission expect that the bailout won’t work. They even handed out a confidential memo outlining the reasons for the expected failures. Among them is the fact that the austerity measures being imposed on Greece in exchange for the cash (cash that can only go pay for debt payment) are too drastic and may sink the country even further.
And I think, ultimately, this is why this can’t ever work. While Greece and the rest of Europe may share a short-term goal to avoid a default, their interests are not aligned otherwise. Among other creditor countries, Germany, Netherlands, and Finland are reluctant to sink more money into Greece and take on big losses on their “investments” without some extreme assurances that the country will get its financial house in order. The deal is trying to impose these measures in a way that may make them even more unacceptable to Greece and impossible to implement. In fact, it is even possible that so much austerity, so fast, is in fact a bad decision.
But can the Germans trust that Greece will start cutting spending in a few years when the worst of the crisis has passed? No. Greece has a sad record of running its country into the ground, and it has a terrible record of implementing policies it has agreed to. The lack of trust and the consequent request for assurances are understandable. Obviously, things would be different if we were talking about another country who looks more trustworthy (here I am thinking about Sweden rather than France or Spain).
The problem is two wrongs don’t make a right. Greece is still a democracy. From what I read, the EU has asked Greece to change its constitution to make payment on debt a priority, and earlier on it suggested that Greece suspend elections. These are extreme measures that, I assume, would make the Greek people furious and unlikely to accept further reforms imposed on them (even good and necessary ones).
The bottom line is that Greece may be better off defaulting now — since it will happen at some point — rather than going through another bailout that’s almost sure to fail. I do understand why things are unfolding the way they are today, but a new bailout won’t help Greece. At the same, it isn’t realistic to ask countries to bail out Greece without guarantees that austerity measures will take place. The EU needs to let Greece default.