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Something is better than nothing

Earlier this month, Free Lunch set out what a good agreement between the Greek government and its creditors should achieve. The one they struck last week fell short of that. My colleague Jim Brunsden has it right when he writes that the deal “patches over the disagreements that have dogged the programme since it was hammered out by euro area leaders in 2015”.

The imminent cliff-edge in July has been averted, as creditors agreed to release the next bulk of loans — enough to refinance billions in bond repayments due in July. That is welcome, but it was also never seriously in doubt. In that respect, 2017 is not reproducing the mistakes of 2015, when Athens came close to defaulting on a bond owed to the European Central Bank, in response to which the ECB may well have forced it out of the euro. A short-term refinancing deal was clearly expected by markets: equity prices had risen strongly in advance of the last few weeks of talks, and stocks and bonds jumped a little higher on the news of the talks’ conclusion.

But all of this could and should have been agreed last year, which would have given the Greek economy more breathing room and predictability to grow now. The delay testifies to how much distrust of Athens makes the economic situation worse and makes it harder for Greece to do what is demanded of it.

Much more importantly, the talks did not fully end the medium-term uncertainty around the terms of debt service owed by Athens. To do so requires a full specification of what Greece’s debt service will concretely look like over the coming years, without which the International Monetary Fund will not clarify (as is also required for predictability) its role in the programme. That uncertainty will continue to depress economic activity.

Still, there was some progress, minimal but significant. The final statement by the eurogroup — the eurozone countries who have guaranteed the borrowing of their sovereign rescue fund — contains a number of positive commitments. While it includes plans for further tax and pension reforms aimed at improving Greek public finances, it also allows for future fiscal stimulus on a contingent basis. That seems to mean that if growth picks up, any additional revenue can be put back into the economy rather than used to repay more debt.

On future debt service, the European creditors once again listed the types of debt relief they will consider to keep debt service within certain limits, which they “stand ready to implement” in 2018. And there is a particularly important commitment to “recalibrate” some of the measures if growth ends up different from what is assumed today. This will help the creditors get away with less debt relief should Greece spring a positive growth surprise — but it also commits them to more should growth falter. It is a weaker version of the explicit GDP-linked debt restructuring Free Lunch has advocated.

All of this was not enough for the IMF to fully come on board with the programme. But it was enough for its chief, Christine Lagarde, to announce she would present the IMF board with a standby agreement — which is more than a fudge rather than a definitive participation in the programme. Lagarde aims for the board to have considered and hopefully approved her proposal by July 27.

So even if uncertainty has not been removed as definitively as it could and should have been done, it is gradually diminishing. So the fiscal squeeze remains — and as we have pointed out before, it is the change in the fiscal position, not its level, that affects growth. Greece has more or less arrived at the destination for its fiscal balance — and with little further fiscal consolidation to come, growth should pick up. There are already many signs of a recovery: broad-based employment growth as discussed by Bruegel’s Zsolt Darvas, and strong growth in industrial turnover and construction.

Any edging towards a more predictable economic environment should reinforce these developments. The economics facts on the ground — nicely reported in Nektaria Stamouli’s WSJ article on the agreement — reveal just how much activity is being held back by radical uncertainty, on top of the undeniable shortcomings of Greek economic governance and a paralysed banking system. So while the eurozone has again mostly kicked the can further down the road, even minor progress is a whole lot better than none.

Other readables

  • The key fact about today’s start of the Brexit negotiations is that the UK enters them without knowing what it wants to get out of them (unlike the rest of the EU, which sets out its negotiating objectives with exemplary transparency). Alan Beattie expertly goes through the options for Britain in the latest edition of the FT’s new premium newsletter on trade. It is also a good time to revisit PunkFT: the animated cartoon explainer I made of the same topic last year.
  • The European Central Bank gives more clarity about how it and its member national central banks make decisions on granting emergency liquidity assistance to banks in trouble.

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