All Quiet Now, But Can Greece Really Thrive Inside the Euro?

After a lot of hubbub, in the end the Greek government submitted a list of policy proposals that elicited a positive response from Brussels, judging them to be “sufficiently comprehensive” to permit the four-month extension of the existing loan arrangements until June.

The responses from the IMF and the ECB were rather more circumspect, indicating strongly that the next four months of negotiations to determine Greece’s relationship with the Eurosystem will be tough and most probably tense.

The IMF noted that the Greek government’s “policy parameters” didn’t go far or weren’t detailed enough, especially about VAT and pension reforms, privatizations and policies to open up closed sectors, including the labor market.

The ECB urged the Greek authorities to act swiftly to “stabilize the payments culture and refrain from any unilateral action to the contrary.” This is believed to refer to matters such as Greek regulations on mortgage foreclosures and to tax and payments arrears in public policy.

What’s the big “deal?”

The “deal” between Greece and its Eurogroup partners has been widely welcomed, and spun according to what people thought would or should happen.

I think that the current “deal” is just Act I in a play with an unpredictable, but very likely bad, ending — where “bad” equals Euro system fragmentation, or Grexit, if you prefer. (Or the even tonier “Grexident.”)

I think it’s fair to say that however people judge the deal and what they think is good or positive about it from Greece’s point of view is really about one thing only: relief that the integrity of the Eurosystem has been preserved.

That is some achievement, given that it looked as though it might not happen. Now, the hope (rather than conviction) prevails that the upcoming negotiations will see a realignment of interests and trust between Greece and its creditors.

Well, who wouldn’t wish for such an outcome?

The problem though, as I see it, is that the economic and social policy agenda on which Syriza scored such a stunning electoral victory is entirely appropriate for Greece, but wholly incompatible with a Eurosystem that I call colloquially, Teutonia. While Teutonia normally refers to the geography of Germany or parts of Northern Europe, I use it to connote a German culture in economics and finance.

In Teutonia, Germany doesn’t always win all the arguments, nor does it or can it impose a policy agenda by diktat. But in the absence of political and fiscal union – of which none of the major countries is in favor – the terms of the (narrow) monetary union will always reflect largely the interests of Germany and a relatively orthodox financial establishment viscerally opposed to the establishment of a genuine transfer, joint liability union.

Can Teutonia be appeased?

That’s a fact I can’t see changing — no matter how mutual trust relations between Greece and Germany might heal after the early year impasse.

And if it doesn’t change, then Syriza’s economic policy agenda will never really get off the ground.

And if it doesn’t, then what next for Syriza and for Greece?

I have no doubt that Teutonia can accommodate a compliant and subservient Greece subject to the will of the latter’s citizens. But Syriza’s election victory was about not being compliant and subservient.

That’s why I’m not confident that the new status quo can hold. At the same time, there is no question that the Eurogroup did cut Greece some slack, but in terms of policy freedom, far less than is sometimes suggested.

In the end, the “deal” came down not so much to economic argument and reasoning, as to the intervention of Angela Merkel and Francois Hollande, who have much bigger fish to fry currently with Russia and the Ukraine – and, closer to home, religious, ethnic and migrant tensions.

The prospect of a Eurozone crisis — with potentially unpredictable knock-on effects following Greek capital controls, default and exit — was a bridge too far at this particular juncture. For the time being, at least, geopolitics trumps all else.

But reflecting on the last four weeks and looking ahead to the next four months, the Eurozone’s narrative of mistrust between north and south has not really been patched up. A new chapter of European instability is only just starting.