Is Greece's long debt crisis finally at an end?
Late last week, the eurozone hammered out an arrangement that will bring Greece's third bailout to a close. There will not be a fourth, and most everyone seems to think Greece's future debt repayments are relatively sustainable. Yields on Greek bonds fell, suggesting higher demand, while the country's stocks and equities rose. Officials are already celebrating the deal as "historic."
Well, let's take a breath.
The eurozone's demented austerity logic remains in force. The fact that Greece doesn't need a fourth bailout isn't a tribute to eurozone policy, but to Greek resilience in the face of that policy. Should anything go wrong, austerity will drive the country right back into the ground.
To understand why, you have to start at the beginning.
The Greek crisis was caused by two things: the Great Recession and the monetary design of the eurozone. Yes, Greece's tax system was somewhat dysfunctional, and its deficits were high going into 2008. But neither of these problems were particularly serious on their own. Then the 2008 crisis hit, and Greece's economy collapsed while its unemployment leapt from around 7 percent to almost 30 percent.
A modern nation that controls its own currency supply (like America or Britain) could've just deficit spent like mad to revive its economy and printed more money to finance that spending if private markets weren't willing to buy its debt. But as a member of the eurozone, Greece doesn't control its currency. The euro is overseen by the European Central Bank (ECB), which also oversees the national central banks. For unfathomable reasons, the ECB refused to print the euros needed to buy Greece's debt at sufficient scale.
That forced Greece to look elsewhere for the money, but private markets drove a hard bargain, sending interest rates on Greek debt into the stratosphere. That left only one option: the three rounds of bailouts organized by eurozone powers and the International Monetary Fund (IMF).
Unfortunately, the terms of the bailout didn't allow Greece to run the deficits it needed to save itself. Instead, the creditors insisted that Greece gut spending on welfare and public services, privatize government assets, and hike taxes. The idea was to get Greece's budget running surpluses, so the country could start paying down its debt. It was a vicious cycle: Austerity measures undercut Greece's recovery, driving its debt load even higher. The bailout money went into Greece, and then went right back out again to its creditors.
Greece's modest economic recovery under these conditions wasn't impossible, but it was pretty remarkable — like someone who recovers from the flu despite their doctor insisting on regular bloodletting.
Greece's economy is now growing: 2.3 percent between last quarter and the same point a year ago. Its unemployment rate is falling, and interest rates on its debt have reached a manageable 4 percent.
More importantly, cooler heads among the creditors have convinced austerity-mongers like Germany to cut Greece some slack on its debt payments. While that debt load remains 180 percent of Greek GDP, the country can pay it off in small increments over the next 30 years, with substantial breathing room over the next decade. Terms of the deal also leave Greece with a cash buffer of 24 billion euros in case anything goes wrong over the next few years.
The problem is the deal also requires Greece to keep taxing more than it spends, basically forever.
Greece must keep running budget surpluses of 3.5 percent of GDP — not counting its debt repayments — through 2022, and of 2.2 percent on average until 2060. Economically, the sustainability of this arrangement rests on Greece's economy growing at least 2 percent per year for the foreseeable future. And some players like the IMF don't sound super confident in that assumption.
Should Greece fail to meet that criteria, the whole deal could collapse. And there's plenty that could go wrong.
The 2008 crisis certainly wasn't Greece's fault, but it wrecked the country's economy all the same. The most likely candidate for another blow from the outside is probably another eurozone country coming to blows with the currency union and maybe exiting it entirely. Italy, for instance, has also chaffed under eurozone rules, and it just elected a new anti-eurozone government that sounds determined to cast off austerity. They may fail. But if Italy provokes a major confrontation, the general market panic could easily spill over into another hike in Greece's interest rates or another recession.
Furthermore, while Greece is doing better, it's certainly not doing well. Unemployment is still around 20 percent, and youth unemployment is over 40 percent. Since 2010, wages have fallen 20 percent, while pensions and welfare programs have been cut 70 percent. Poverty is up substantially.
By all accounts, these metrics are all going to keep improving, but very slowly. You could hardly blame the Greek people themselves if they just got fed up and decided to blow up the whole arrangement. The country's next election is in 2019, and it already looks like the win may go to the center-right New Democracy party — which is ripping into the current government for knuckling under to eurozone demands.
In short, Greece and the eurozone have struck a deal they can both live with, at least for now. But this rickety arrangement only survives if absolutely nothing else goes wrong. Otherwise, austerity's full destructive force will come flooding right back in.
The Greek crisis is dead. Long live the Greek crisis.