18 June 2012

Douglas J Elliott: Greeks avoid triggering immediate disaster; now for the tricky part

Europe dodged a bullet yesterday, writes Elliott for Brookings. However, looking beyond this year, Greece continues to face very severe problems that could still conceivably cause it to fall out of the euro area.

Unfortunately, the new coalition government now faces an extremely tricky set of tasks which it may not be able to pull off. The easiest part is probably getting some interim funding to keep the Greek government from running out of money in July. This is critically important, but Europe is likely to bend over backwards to find a reasonable answer to the short-term crisis, since it really does not want the new government to fall and provoke another election that might well bring Syriza to power.

The hard part comes next -- finding a new version of the bailout agreement which reflects: the economic reality that no government could meet the current deficit targets; the political need for substantial improvements in the terms to mollify a Greek public that strongly dislikes the current agreement; and the need to avoid all the political pitfalls that exist in the rest of Europe created by fears that the Greeks will just take any additional funding without fulfilling their own promises of reform.

The new Greek government will probably be able to come to an agreement with the troika eventually to rewrite the existing accord significantly. However, this is far from assured. For one thing, all it would take is for a dozen or so members of parliament to desert the coalition government and refuse to accept the necessary sacrifices embodied in a revised agreement. If that happens, the government would fall and would probably be replaced, with or without an election, with a harder line government or political chaos. There are also many political constraints in the rest of the euro area that could make a sensible agreement difficult to reach.

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