A Greek settlement?

Although no one emerges from the Greek debt crisis smelling of roses, Alexi Tsipras has perhaps lost more than most; the new deal for Greece he promised the Greek electorate in the run up to his election six months ago is gone; and the one that today he has been forced to accept is worse than the that on which he staked his future when he called a referendum eight days ago.

Several things are clear. First Germany's desire to stick to the rules has trumped France and Italy's desire for the appearance of European Unity. Second, the crisis has exposed flaws in the structure of the common European currency, which looks like it has fallen between the two stools of monetary and fiscal independence and full integration, a position that it turns out is unworkable. Third, it has shown how important are integrity and honesty in negotiations; and that when they are gone things get very difficult very quickly.  And finally, any deal which might have made economic sense has been distorted by the whipping up of public opinion and the resulting transition from the realm of finance to that of politics.    

It would appear that the economic can has again been kicked down the road in that Greece may have been forced to make promises in return for a lifeline that it simply hasn't the capacity to deliver. And even supposing that the numbers did add up, something Paul Krugman disputes, Greece's history of lax implementation of revenue raising policies and its attachment to spending may scupper implementation of key parts of the deal; and that's even assuming that the deal is approved by an parliament that must feel angry at Europe and betrayed by its prime minister. 

One commentator asked a Greek MP this morning whether this was 'Europe trampling on the democratic will of the people'. I understand journalists like to ask provocative questions but this was at the sillier end of the spectrum. Europe has 503 million people, 482 million (97%) of whom were excluded from that referendum; and ultimately they are footing the bill.

If European monetary union is to succeed, the notion that economic under-performance in one region can be solved by labour migration, which replaced currency fluctuation as the purported adjustment mechanism, must be largely discarded. Instead the richer Europe countries will have to come to terms with the fact that direct transfers of wealth may be required semi-permanently to support the less productive parts of the European economy, while the latter must accept that those transfers will come with strings attached: and that effectively means a loss of sovereignty—something the Greeks are just finding out.