Greece and Europe reach a deal after all

Greece and its European creditors reached a tentative deal a few hours ago after a weekend of intense acrimony and tough negotiation. The three year deal for about 85 billion euros of new funding is good news for the rest of the world, assuming it holds, because it reduces the risk of European problems slowing the global economy.

Two substantial procedural risks remain, although a final deal is very likely. First, the Greek parliament has to pass, within a few days, austerity and structural reform measures that appear to be at least as tough as the ones that Prime Minister Tsipras campaigned to reject in the referendum a week earlier. This may create a crisis within his Syriza party, but he seems likely to retain his primacy within his own party and he certainly has enough votes from pro-euro opposition parties to reach a majority if he can manage to hold most of Syriza. He already got a very strong majority in parliament in a vote on Friday asking support for negotiating on the basis of his proposals, although admittedly he then had to make further concessions in Brussels. Second, the details of the new agreement will have to be negotiated between Greece and its creditors, and there could yet be a falling out that would leave the “deal” in tatters. This seems improbable, though, given the political capital all sides will have expended in getting to the provisional, high-level agreement.

How did Greece end up with a deal that appears on the surface to be worse than the prime minister and the Greek voters rejected so recently? There are four principal factors.

Getting a three-year deal for over 85 billion euros is substantially better than a short-term deal for around 15 billion euros.  The concessions Tsipras made are only mildly tougher than what would have been required to gain a lot less money for a much shorter period. This is a real gain for Greece, although it is substantially mitigated by the conditionality that will be applied to accessing the funds, which will doubtless be doled out based on concrete steps taken by the Greeks. The value of gaining an immediate long-term agreement seems significant. It is impossible to know exactly what concessions would have been required with the two step procedure of reaching an interim funding deal followed by a longer-term accord, but the total requirements would almost certainly have been higher.

There are a few face-saving concessions for Greece. The Summit statement suggests that there may eventually be room for the maturity of some Greek debts to be lengthened and their interest rate chopped further. Negotiations on that could commence after the “first positive review” of the detailed program. Promising to consider and negotiate on this point is not a big concession, but it has symbolic weight. It is also the right thing to do. There is also the carrot of a potential 35 billion euro investment fund for Greek projects, spread over three to five years, although it seems likely that the great bulk of this would be funds that would be available anyway through various European Union programs.

European hardliners were reassured by weak market reactions to the referendum. Ironically, the Greek referendum weakened Tsipras’ hand by apparently showing that markets were not that concerned about the effects of Grexit on the rest of Europe and the world. From the time the referendum was unexpectedly called until Tsipras won it decisively, markets did move in response to the clearly higher risks of Grexit, but not very far, except in Greek markets. This weak response substantially cut the perceived probability of a short-term disaster for the rest of Europe if Greece did leave, making it easier for the hardliners to insist on tough conditions. As a result, Germany and a number of other nations hardened their stance and insisted on more actions by the Greek government in exchange for funding, rather than stepping back and reducing their demands as the Greeks doubtlessly had hoped.

Greeks were justifiably scared by the impact of the temporary bank closures. The sharp shock to the Greek economy — and the everyday lives of Greek citizens — from the bank closures and associated capital controls brought home the risks of any failure to reach a deal. When combined with the clear willingness of the more hardline European countries to accept Grexit if the alternative was a bad deal from their viewpoint, this changed the perceptions of many Greeks as to what the stakes were. Tsipras won the referendum by insisting that a “No” vote would give him more leverage to reach an improved deal while remaining within the Eurozone. Keeping the euro was very important to many of the voters who ended up supporting him in the referendum. However, a similar argument in favor of turning down a deal no longer applied, as the alternative had clearly become Grexit rather than an eventual better deal.

One final observation is that it is now quite evident that Greece’s audacious negotiating strategy failed to extract a better deal than a less confrontational approach would have.  The newly installed government led by the Syriza party chose the path of brinksmanship over the last five months, presumably in the belief that the creditor governments in the rest of the Eurozone would sufficiently fear Grexit that they would ultimately make more concessions than a softer approach would have yielded. The government also chose to emphasize its radical Left credentials as the purportedly legitimate representatives of the people of Europe and gave strong support to parties with similar ideology, such as Podemos in Spain. Naturally, supporting the opponents of existing governments and implicitly questioning the legitimacy of most of them was never going to win friends among its negotiating partners. As I have written previously, the Greeks squandered a great deal of goodwill across Europe through their words and their negotiating tactics.

Syriza gambled and lost, causing the Greek economy to plunge back into recession as uncertainty and eventual capital controls strangled the economy. This would potentially be justified if a better ultimate deal resulted, but it is very hard to believe that the Greeks would have failed to do at least this well, with far less pain, if they had played nice instead. The only remaining argument in favor of their strategy is that it is possible that Tsipras had to be this confrontational in order to hold Syriza together while moving towards the concessions to Europe necessary for a deal. Again, it is hard to imagine that there was no better way, if only a toned down version of the tough approach to negotiations, but it is impossible to prove this.

In any event, there now appears to be a deal, which is definitely good news. Let us hope that it holds together through the remaining steps, leads to positive effects on the economy, and can be implemented over three years without any new and risky confrontations. None of these are certainties, but the alternative of Grexit would be so damaging that I, for one, will be celebrating the fact of a deal.