After a marathon of negotiations last night, Greece agreed to asked-for reforms and a pledge to strap itself in a fiscal straitjacket to save its banks and stay in the euro. Germany was the hard-liner that did not budge an each. The deal worked out in Brussels requires approval from several European parliaments.
The Dow opened 150 points higher on the news. Here’s the deal:
What Greece must do
- By Wednesday, Greece’s ruling party, Syriza, must pass a host of policy changes as a show of good faith. Those include cuts to public pensions and sales tax increases demanded by Europe to increase Greek budget surpluses.
- Then, over the following days and weeks, it must take other steps to modernize its economy, such as introducing fresh competition to a host of industries from bakeries to drug stores, privatization of the state’s power company and changes to labor laws that would would loosen the power of labor unions and make it easier for companies to fire workers.
- Greece must also contribute 50 billion euros of privatized assets — such as state-owned companies — to a fund that will help Greece pay off its debt. A quarter of this fund could be used as a domestic economic stimulus, which could grow the economy and generate additional raise tax revenues for debt repayment. (1 euro buys $1.11.)
What Europe will do
- In coming days, Europe will advance a loan of 10 billion euros to help Greece make a 3.5 billion euro payment due to the International Monetary Fund on July 20 and keep its banking system alive. Germany will vote on the agreement as soon as Friday.
- This is not part of the formal agreement, but it’s widely assumed that the European Central Bank, which has been funding Greek banks with emergency loans, will continue that help in light of the deal.
- After Greece passes initial reforms, Greece will receive up to 77 billion more euros over three years. About a third of that will be used to strengthen its banking system, which has been shut down for two weeks amid rapidly declining deposits.
- Europe will also commit to review Greece’s total debt burden, potentially giving the country more time to pay it back. But Greece will not get the reduction in face value of the debt that it has asked for.
In other words, Greece is going to try to grow its economy by firing workers and modernizing companies so that workers won’t be needed. And with heightened unemployment and a strain on social services (if any), Greece’s tax base will…. uh…. grow? No. This is stupid.
Of course, the euro is stupid. When you have 20 or so countries, each with different economic needs, sharing a single monetary policy but not a unified fiscal policy, this is bound to happen. At any given time, money gets to be either be too tight or too loose for some EU members, and there wouldn’t be anything — like unemployment insurance — to balance it out. The euro, in other words, is a paper monument to peace and prosperity that has made the latter impossible for some countries.
None more so than Greece.
For us here in the U.S., assuming the Greek crisis is over, we can now turn our attention to China which, as I recently noted, is in some serious shit.