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Washington, D.C.- A deal reached between the Greek government and European authorities represents a “significant retreat” by the so-called troika and “shows that their austerity program, which has failed miserably, is no longer politically enforceable,” Center for Economic and Policy Research (CEPR) Co-Director Mark Weisbrot said today.
Greek government officials reached a deal with European authorities earlier today to allow bailout funds to be extended to Greece for another four months. As The Guardian and other outlets have reported, the new Greek government agreed to submit a list of reforms to the European authorities on Monday. But the agreement gives Greece fiscal flexibility, lowering previous fiscal surplus constraints. Bloomberg cited a Greek official as saying that tax increases and cuts to pensions were not part of the agreement. The accord forestalls the immediate threat of Greece being forced out of the eurozone through a loss of support from the European Central Bank (ECB).
“European officials had a gun to the head of the Greek government, and they just pulled it away – at least for now," Weisbrot said. "This is a significant retreat and shows that their austerity program, which has failed miserably, is no longer politically enforceable. The Greek election has been shown to be a turning point for Europe.”
Weisbrot was referring to European officials’ threat to collapse the Greek financial system by cutting off needed credit. On February 4, the ECB announced that Greek government bonds could no longer be used as collateral for the least expensive loans from the ECB. Greece was still eligible for Emergency Liquidity Assistance, but last week European officials indicated that this too would be cut off if Greece did not agree to continue implementing the terms of previous governments’ agreements.
“Today’s agreement will allow the new Greek government some fiscal space to increase employment and economic growth, and undo some of the damage of years of troika-induced depression,” said Weisbrot. “That is the most important thing. The details of what to do about the debt can be worked out later.”
Weisbrot noted that the agreement allows for a smaller primary surplus in 2015, and indicates that Greece will not be held to the large primary surpluses (more than 4 percent of GDP for years, according to the IMF Fifth Review), that European officials wanted to hold the government to. This relaxing of fiscal policy is most important to allow for the recovery that Greece needs, he explained.
“The next few months will be important, since the confrontation between the new Greek government and the European authorities is the first time since the Great Recession that voters have successfully been able to challenge the troika’s previously unaccountable power,” said Weisbrot. “Their policies have been widely unpopular in Europe, but this is the first government that is really forcing them to change.”
European finance ministers will review the deal next week, and the German parliament still must approve it before it can be considered final. “Now the ball will be in the European authorities’ court,” Weisbrot remarked. “They’ll have to be the ones who say that what Greece is doing isn’t enough, and they’re increasingly going to appear unreasonable, not just to the Greeks but to the world.”
For more information, see CEPR's work on Greece here.