After months of uncertainty and tense negotiations — which followed several years of brinksmanship and anxiety over austerity and debt — Greece and the eurozone appear to finally have a deal.
Or they at least have a potential deal, pending Greek Prime Minister Alex Tsipras' ability to pass the eurozone's tough conditions though his country's parliament. That in itself will be no small feat, given that barely a week ago, nearly two-thirds of Greek voters decisively rejected a referendum on whether Greece should acquiesce to less stringent demands.
But here's the thing: Even if Tsipras succeeds in jamming this through parliament, this new deal will be a disaster. Not a disaster in ideological terms, but objective terms. By its own ostensible metrics for success — restoring Greece to economic health, preserving European unity — the contours of the deal almost ensure failure.
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Is there any hope of cleaning up this mess? Of saving Greece from the eurozone, and the eurozone from itself? Perhaps. But now that the European players have proved their complete imperviousness to economic reality, and even Greece’s pugnaciously left-wing Syriza party is on the cusp of knuckling under, that hope rests with one man: European Central Bank President Mario Draghi. He is the only one who might actually follow the Greek people's lead and give the eurozone the finger.
The deal hammered out between Tsipras and Greece's European creditors requires more cuts to Greece's pension system and other social programs, along with some tough tax hikes. For the next several years, Greece will have to bring in considerably more money in tax revenue than it spends. All the international evidence we have says this package of policies — under the popular umbrella term "austerity" — amounts to taking money that could be used to rebuild Greece's economic ecology, and simply shoveling it out the door. Greece's economy shrank following the 2008 crisis, but it didn't go into a tailspin until Europe imposed the first round of austerity measures in 2010. Greece has vastly underperformed what the International Monetary Fund (IMF) and the other European creditors projected when austerity began. And the "more austerity equals economic shrinkage" relationship holds up across the European continent.
With their conditional demands, the creditors have been effectively guaranteeing their bailouts will fail: The money goes to the Greek government, but instead of making its way into Greece's economy through spending measures, it just goes right back out again to pay the country's obligations. At best, it's just enough money to keep the country from plunging completely into the abyss. Hence the farcical, never-ending dynamic of the Greek crisis.
The best-case scenario here is probably that Greece keeps running in place: Great Depression levels of unemployment as far as the eye can see. Of course, no country would endure that, so we're also guaranteed further political upheaval in Greece — perhaps the toppling of Tsipras and Syriza's majority — and another game of chicken with the creditors somewhere down the line.
And all that assumes Greece won't repeat what happened when the international community forced Germany into a massive depression to pay down its debts. In case you missed that day in history class, Germany descended into fascism.
So here's how Draghi comes into the picture: There isn't just one Greek bailout — there are two, occurring side by side. One bailout is the fiscal bailout, run by various creditors in the eurozone. The other is a monetary bailout, which is the flow of cash the European Central Bank (ECB) has kept up to Greece's banks.
That bailout was never as large for Greece as it was for other countries, like Italy, Ireland, and Spain. And it's slowed to a trickle in the latest confrontation. But unlike the first fiscal bailout, which was and is limited by the standard fiscal considerations and risks any lender must grapple with when letting someone borrow, the monetary bailout is backed by the ECB's ability to create more euros, and is thus effectively limitless. (The danger in money creation is obviously inflation, but Europe is so far removed from that risk that to worry about it at this juncture would be the equivalent of a starving man worrying about his body mass index.)
The eurozone's monetary system is actually a bit smarter than many of its critics give it credit for. Each country retains its own national central bank, and each central bank draws upon the ECB's money-creating abilities to bail out the economy in its jurisdiction if it so chooses.
In other words, if Draghi and his cohorts in the monetary system gave the okay, Greece's central bank could start buying up as much of the Greek government's debt as it wanted. That would allow the government to shift from a budget surplus to a budget deficit — to begin pumping money into the Greece economy, rather than sucking it out. The government could rebuild its social safety net to help its millions of unemployed, begin providing incomes for its poor, and restart public investments. That same flow of money could be used to recapitalize Greece’s private banks, allowing normal economic activity to resume.
It would be a fiscal bailout by way of a monetary bailout.
Of course, such a move would require the Greek government to buck the creditors and rip up its agreements to retool Greek fiscal policy. But if such an offering were on the table from the ECB, it seems a certainty the Greeks would take it.
So the choice lies with Draghi and his underlings in the monetary system. The ECB is officially a "nonpolitical" entity. But as it is with the Federal Reserve here in the U.S., that division works more in theory than in practice. The monetary officials are in close political communication with the creditors and the other eurozone officials, and so far Draghi has been willing to serve as Europe's henchman — keeping Greece's banks on a tight leash, and severely limiting the degree to which they can buy up the Greek government's debt.
There's a certain poignancy to Draghi's efforts to keep the ECB above the fray of politics in the European-Greece smackdown. Western governments have tried to draw a distinction between fiscal policy as a political matter, and monetary policy as a "rules-based" matter. But the disaster in Greece lays bare how silly — indeed, how destructive — that fiction really is.
So help Greece, Mario Draghi. You're their only hope.
