Prospects for a new financial bailout package for Greece moved a step closer as European and Greek leaders reached an agreement to begin negotiations. At the end of a marathon through-the-night meeting, European Union (EU) Council President Donald Tusk tweeted that a bailout via the European Stability Mechanism (ESM) program would involve “serious reforms and financial support.”
The details of the deal and its implementation are still to come. Surprisingly, if the deal goes ahead, it looks set to include tougher austerity conditions than the ones Greek voters rejected in a referendum on July 5. And, regardless of the fine print, Greece will find it difficult to emerge from its enormous debt burden and move to a path of sustainable economic recovery.
- Broadly speaking, our European economists and sovereign debt analyst believe that the latest developments mark neither a significant step toward a definitive resolution of the debt crisis nor a remedy for Greece’s structural economic challenges.
- Greece’s ability and willingness to comply with the likely terms of a new deal are open to question. Sooner or later, onerous austerity measures and ambitious reform plans are likely to become a political flashpoint for Greece, and for the EU.
- Though Greek assets may rally with progress toward a deal, the broad longer term outlook is challenging. Despite support from the Emergency Liquidity Assistance program of the European Central Bank (ECB), Greece’s banking sector is under pressure amid rising nonperforming loans, deposit outflows and recession.
- Given the small size of Greece’s economy, developments there should have a limited direct economic impact on the eurozone and elsewhere in the near term. Moreover, quantitative easing by the ECB, a weak euro and low oil prices should continue to provide support to the European economy and financial assets, in the view of our economists.
- Over the medium term and longer, fractious negotiations between Greece and its official creditors have exposed major divisions among European officials and policymakers, and could have profound repercussions for the structure of the eurozone — especially regarding its weaker economies.
- In light of these developments, our economists and sovereign analyst believe that the possibility of Greece’s exit from the eurozone remains far from negligible.
- The situation in Greece has raised fresh questions for the eurozone on whether a monetary union can be successful in the longer term without closer fiscal and political union. That said, with France and Germany due to hold elections in 2017, there is little political appetite for further fiscal and political integration at present.
In some ways then, Greece has become a battleground for competing visions of the future shape of the eurozone. Decades ago, Jean Monnet — considered one of the EU’s founding fathers — noted that “Europe will be forged in crises, and will be the sum of the solutions adopted for those crises.” But whereas past crises have often resulted in the pursuit of closer integration, today’s political tide, if anything, may be moving the other way.