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Few believe a bailout that leaves Greece with a debt burden equivalent to 120 per cent of GDP is likely to work. Many fear that after five years of recession during which GDP has slumped 14 per cent, Greece is suffering austerity fatigue and that there is no longer the political support to implement the structural reforms vital to boost growth. Besides, after two years of missed targets, confidence in official forecasts is understandably very low.
The perception that this bailout won't work is toxic since it means Greece's membership of the euro remains an open question. Following the latest deal, the private sector will hold just 30 per cent of Greek government debt, all of it under UK law, limiting the prospects for further debt relief. That suggests any future losses will fall on eurozone taxpayers, a far harder sell politically that could fuel demands for Greece to be kicked out of the euro. Who will trade with Greece with that threat hanging over it? Who will provide the investment vital to creating new jobs and growth?
Policy-makers must therefore use any post-bailout respite to deepen European integration. Investors need to be convinced that the political will exists to save the euro; voters in Greece need to be convinced it is worth saving. The crisis has unleashed powerful and deeply unattractive forces across the Continent, reflected in rising support for extremist fringe parties. At the same time, increasing risk aversion among banks, investors and corporations threatens to pull the eurozone apart by stealth as cross-border flows of capital and trade seize up. The ECB has contributed to this balkanisation of the financial system by allowing national central banks to set individual collateral rules.
Only a powerful demonstration of collective political action can reverse these trends. Easing the bailout terms for Portugal and Ireland, in recognition of compliance with their austerity programmes, would send a signal that the eurozone understands the importance of carrot as well as stick. The European Union must also urgently deepen the single market, including forging ahead with moves to liberalise energy markets and the services sector, and reforming the Common Agricultural Policy. And it should expand the European Investment Bank and boost its structural funds to finance a genuine Marshall plan for Greece and other peripheral countries.
Finally, the eurozone needs to acknowledge that there can be no solution to the euro crisis until the fate of its banking system is separated from that of its sovereigns. That will require the creation of pan-European deposit insurance and ultimately eurobonds to provide banks with an alternative risk-free asset.
Unless this is what eurozone finance ministers have in mind as they sit down on Monday, they should have no business signing the deal. To go ahead with a flawed Greek bailout without a plan to accelerate eurozone integration and create a functional monetary union would be an act of calculated cynicism that would simply deepen Greek—and European—agony.