The Greek Drama Takes Another Turn Toward Tragedy … and Uncertainty


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Mauro Guillen and Stavros Zenios discuss what the latest deal means for Greece and the EU.

After a marathon meeting that lasted 17 hours, the euro summit in Brussels this weekend reached a deal that could become the basis of Greece’s third bailout since 2010. The terms of the proposed agreement – for $95 billion over the next three years – are by now well known. These include pension reforms and other austerity measures, the creation of a 50-billion euro privatization fund, and close oversight by the so-called troika of the European Commission, the European Central Bank and the International Monetary Fund. Legislation approving some of these changes has to be in place by July 15. This is politically challenging since Greek voters widely rejected similar — and milder — proposals in a referendum held a few days earlier.

Little wonder that Greek prime minister Alexis Tsipras’s deal with European leaders has ignited considerable controversy. Supporters claim that European leaders – led by Germany’s Angela Merkel and France’s Francois Hollande — have forged an agreement that will help impose long-overdue fiscal discipline on the Greek government. Critics, however, counter that the deal is “humiliating” and possibly an effort to force regime change in Athens. In addition, it seeks to impose austere measures that have failed to work in the past, and which many Greeks consider punitively painful. Former Greek finance minister Yanis Varoufakis compares the deal to the infamous Versailles Treaty of 1919 that was imposed upon Germany at the end of World War I.

While a Greek exit (or Grexit) from the eurozone has been staved off – at least for now – several questions remain, which Knowledge@Wharton posed to two experts: Wharton management professor Mauro Guillen, director of the Lauder Institute, and Stavros Zenios, a senior fellow at the Wharton Financial Institutions Center and professor of finance at the University of Cyprus.

Guillen notes that the agreement shows that the hard-liners won, and while the terms are very tough, this reflects the reality that trust between Greece and the rest of Europe has evaporated. Zenios points out that while Greek debt clearly is unsustainable, the agreement touches upon a number of issues but fails to address fundamental problems.

An edited transcript follows.

Knowledge@Wharton: What is your view of the deal that Europe’s leaders struck with Greece after the marathon meeting this weekend? What are the pros and cons?

Mauro Guillen: Essentially, it’s an agreement to continue the negotiations towards a third bailout of Greece. The little that we know about the terms clearly signals that hardliners won. Greece is being asked to meet very specific conditions in exchange for a bailout. The reason for that is Greece has been dragging its feet for the last six months, not really implementing any reforms, not really coming up with a plan as to how to return its economy to [one] that can compete globally.

At the same time, it is important that the summit that took place over the weekend and the marathon meeting itself was about a contrast between two concepts of Europe. On one hand is the French concept, which is that a united Europe is better than a divided Europe and we should try to keep it united at any cost. The German view is that a united Europe is generally preferable, but not at any cost. In the end, the French view prevailed. Germany essentially made a concession, saying, “Okay, we’ll bail out Greece for a third time.”

Stavros Zenios: Actually, it’s not yet an agreement — this is the interesting thing. It’s an agreement that if Greece does certain things by Wednesday, then they will start discussions for a new bailout program for Greece. Of course there was great relief after 17 hours of a marathon meeting, and everybody thought, “Wow, there is a solution.” But I’m afraid there is a long way to go.

The heart of the problem has not been addressed, which is the issue of debt sustainability. There is a [July 14] report by Reuters that the IMF (the International Monetary Fund) informed the leaders just after the meeting that Greece’s debt is not sustainable, as they need much more dramatic extension or upfront haircuts. That problem has not been addressed.

Another major concern is the reform agenda that the prime minister (Alexis Tsipras) accepted. Experience tells us that this kind of agenda works if the country has ownership. An agenda was imposed on Greece after strenuous negotiations, but it’s not clear how it’s going to work. If the prime minister manages to keep his government together and pass the required reforms, this is positive.

Knowledge@Wharton: Given the fact that Greek voters in their referendum a few days earlier had rejected many of these proposals, will the Tsipras administration get the political support it needs to implement the deal? Or was this an attempt by European leaders to force regime change upon Greece?

Guillen: [There is] a little bit of everything that you’ve mentioned. There are two steps here. One is the Greek parliament needs to enact some of those reforms — pension reforms, raising the sales tax and the value-added tax and so on. The second step is implementation of those reforms. You can approve as many reforms as you want, but if you don’t follow through and ensure in the next months and years that you’ve implemented them correctly, they won’t have their intended effects.

“The heart of the problem has not been addressed, which is the issue of debt sustainability.”–Stavros Zenios

The issue now is that Tsipras has agreed to terms that were explicitly rejected by more than 60% of the Greek population in the referendum. So he is risking a rebellion from within his party. I would assume that some of the opposition parties would actually vote in favor of the reforms. That would create an even more bizarre situation in the next few weeks, in the sense that the prime minister will be supported in Parliament, not by his own party, but by some other parties.

In other words, the situation is in flux and very volatile and I wouldn’t be surprised if this government failed. Twitter  If the Tsipras government were to fall, that doesn’t mean there will be new elections. What it would mean is that the parties represented in Parliament would try to look for another coalition or another way of governing the country.

Zenios: There has been a tradition, unfortunately, in Europe to force a regime change. We have seen it happen, for example, in Italy. [Greece’s] newly elected prime minister seems to be very popular. The referendum, on the one hand, strengthens his internal popularity. People realized quickly that things were going to be much worse, and it’s not clear if a “yes” vote would have made a difference.

The reason this new bailout is so strict is not about a “yes” or “no” in the referendum. It’s more about the fact that Greece for five months was negotiating without making progress and things were getting worse and worse. This is what makes a big difference. If the bailout [is denied] because of the “no,” that would be vindictive on the part of the Europeans. I hope that’s not the case.

The issue that you’re correctly raising — and many are asking – is: “Will the government survive?” It calls a referendum to reject a proposal, and then they accept a stricter proposal. It seems that the prime minister would have enough support in his party, plus support from the other pro-European parties … to push the required legislation through so he’s going to win the current vote.

But then, what happens? You are going to be in power and then a big part of your own party is not supporting you? This is a big question mark. Although the junior partner in the current government has said it would reject that agreement and vote “no” in parliament, they would still support the prime minister because they feel he had done everything he could and there was no other option.

Knowledge@Wharton: Critics have described the terms of the deal as “humiliating” and some have compared it to the Versailles Treaty. Do you agree with the critics? Why did the Greek government prefer accepting the deal to leaving the eurozone?

Guillen: The terms are tougher. I wouldn’t say they’re very hard, but they’re tougher than they were two or three weeks ago. The reason for that is that whatever trust Europeans had in Greece has evaporated. The important thing to keep in mind is that at least the way the European group has communicated the agreement is that Greece, in order to get the bailout, has to pass those reforms in the next few days. In other words, it seems as if nobody is willing to take Greece’s or the prime minister’s word, for whatever it’s worth. [That is] because they’ve changed course and demonstrated time and again that they’re not reliable.

The other issue here is that the party that supports the government, Syriza, is a left wing, anti-austerity party that is, in essence, very populist. It’s going to be very hard for that kind of a party to support the kind of austerity measures that the Europeans are asking in return for a third bailout.

Now why did this happen? Why did the terms get tougher? Once again, it is because the Europeans no longer trust the Greeks. How did they make Tsipras agree to it? It was just a question of, “Hey, you don’t agree to this? We will tear off the funding and your banks will collapse.” There was a very clear message over the weekend sent to Greece: “You know, it’s in your hands, but we can stop this. We’re not going to go along with what has been going on over the last six months.” In other words, the rest of Europe wants a change in the behavior by Greece.

“The situation is in flux and very volatile and I wouldn’t be surprised if this government failed.”–Mauro Guillen

Zenios: [As for] the comparison to the Versailles Treaty — it is tricky to do historical comparisons. We have to be clear when we [make comparisons with] the Versailles Treaty — in those days, Germany was paying. While Greece, even if it has a sustainable debt and this debt relief is paying very little — there is a grace period. Historical comparisons have some appeal, but they are never fully accurate.

On the humiliation — unfortunately, it is true. When the Greek government and the prime minister, even after winning the referendum, realized that there were not many options and [Tsipras] was not willing to abandon the euro, then he should have been shown more sympathy, more support. Once he agreed on the reforms and on rolling back some of the legal actions he had taken, he should have been offered more generous terms in handling the debt issue, which IMF is bringing up as well, and in a more conciliatory tone.

The first thing he did after [Tsipras] won the referendum was to ask the very controversial minister of finance (Yanis Varoufakis) to step down. At that time, I thought that was a wise move. You show that internally you have power, but you also show that you remove from your cabinet a controversial figure. He was not met with a similar conciliatory tone from the other side, except from France to a large extent, Italy, and of course, the [European] Commission. But Germany, the big player and the big creditor, was constantly raising the stakes, including the very ill conceived idea of a temporary exit of Greece from the euro.

Knowledge@Wharton: While the deal opens the door to another multibillion euro bailout for Greece, it also imposes severe measures of austerity. What will be the impact on the Greek economy?

Guillen: This is the problem. This is where I start to disagree with the terms of [the agreement] or the way the negotiations are being conducted. Let us make two assumptions. One assumption is that Greece stays within the eurozone. In that case, you don’t want to be in a situation in which every two or three years, you have to extend another lifeline to Greece — whether it’s a bailout or some kind of financial support.

You want the Greek economy to be competitive again. That’s going to be hard because the Greek economy has not been doing well for the last 10, 15 or 20 years. It’s going to be very hard within one or two or three years to reverse that situation. This is why a lot of people are saying that this amount is just kicking the can down the road, buying some time, because — if this bailout lasts for three years — there is no way the Greek economy can stage a comeback in just three years. The kinds of reforms that they would need to implement would need to be pursued for a long period of time so that the economy becomes competitive again.

The second assumption is that Greece leaves the euro. In that case, Greece would continue to be a member of the European Union, but not the eurozone. It would have its own currency, the value of the currency could become competitive quickly, and it would have many other problems. The short-term shock would be tremendous. In that case — which is what Germany said — the Greeks can continue to do what they have been doing for the last 20 or 30 years, but with their own currency.

Zenios: This is the reason why I’m not optimistic, as it has not addressed all their problems. This is the part where Greece was right, saying more and more austerities are driving the economy into a recession and are making the problem worse. Data shows that Greece has lost the same percentage of GDP like the United States during the Great Depression — and it has been going on for much longer. So Greece is right and many American economists have been criticizing the Europeans with this insistence on austerity.

On the other hand, Greece needs the reforms. The positive thing is that the Greek government accepted the reform legislation. It is much easier now for a left government to put a signature on the deal to push through this. The center-right government, when they would put their signature, would get fear of opposition from the left, at least from Mr. Tsipras and his party, and things would not go very far. So by having a left government, at least there is a ray of hope that the reforms will go through. But we’re not going to see growth coming very quickly. It’s well understood that reforms take time to [bring about] economic recovery.

Knowledge@Wharton: What will be the impact on the rest of the eurozone?

Guillen: At this point, governments, banks and even the market’s investors have already started to speak about what would happen if Greece were to leave the eurozone. It would be logical to assume that there would be some turbulence in the markets, but I don’t think it would be anything like 2008 at all.

The more extensive damage would be over the long run to the process of European integration, because essentially, it would be a major setback. The introduction of the euro in 1999 was a major step forward in integrating all these economies. If Greece were to leave, that would be a major step back, and that would also mean that any other country within the eurozone could be subject to the same outcome. So it introduces an element of uncertainty.

It will also complicate the British process in terms of the referendum that Prime Minister David Cameron is planning for the U.K. — in this case, for European Union membership. This is why government and European Union officials want Europe to become more integrated, and why they want to avoid a Greek exit at any cost. It would be such a reversal, such a setback, that it would be very difficult to overcome.

Zenios: One of the reasons Greece got such a bad deal or such a very strict deal, was when the rest of Europe realized that the markets were not reacting to the potential of a Greek exit. Everybody felt that the currency could survive without negative impact. There was a very small increase in the [bond] yields of the countries like Spain, Portugal and Cyprus, but that quickly went back. That was part of the argument for those in favor of a Grexit — that without Greece, the rest of the eurozone will be stronger. There is no impact there.

But it has created a lot of ill will on the political front at a time when Europe needs more integration, and it’s losing the faith of its citizens. You see a lot of resentment that this is not a union based on solidarity [as envisaged] by the founding fathers, but it is based on everybody’s personal interest.

Unfortunately, local politics play an important role in the drama. The Greek prime minister could not deliver what he ought to deliver — that was reforms — because of his own internal political base. The German chancellor could not deliver what she should deliver, which is more generous support and debt relief — again, because of her own internal political base. This is a big concern when Europe-wide decisions are affected so much by internal politics.

“The terms are tougher…. The reason for that is that whatever trust Europeans had in Greece has evaporated.”–Mauro Guillen

And, with a head of state debating for 17 hours to come up with an agreement, I would be concerned. I would not trust anybody after 17 hours in a room to have clarity of mind to make the right decision.

Knowledge@Wharton: What role did the different perspectives of the Germans and the French toward the eurozone play in the way negotiations with Greece were handled?

Guillen: Germany — as we know from statements and from internal documents that were leaked — was very much ready to let Greece go. Given that, it’s not that they’ve run out of patience; it’s just that they see no end to this series of bailouts. Along with Germany, we find that countries like Finland, and even the Netherlands and some of the Eastern European countries, especially the smaller ones, also are asking why Greece should get special treatment.

The French, however, have always been so much more interested in European integration. Germany now is a much bigger economy than France and is performing much better. The French have just the opposite view and they’ve had this view for the last 30 or 40 years, which is that more integration is always better and we shouldn’t let any country — whether it’s Greece or anybody else — fall through the cracks or fall off the cliff. They are always involved in European solidarity and always believed that more integration is always better at any cost.

Zenios: France was catalytic in reaching an agreement because they were the first ones to get up and say the Greek proposal makes sense and is a good basis for negotiation. That influenced positively a lot of the bad will that the negotiating strategy of [former Greek finance] minister Varoufakis had created. France was very vocal about no exit from the eurozone: “We are not going to kick out any country.”

One aspect of the German proposal that was humiliating — where the comparison with Versailles was made — is that Greek assets … of about 50 billion euros should be transferred to a foundation in Luxembourg to be disposed of and pay back the debt. This was unthinkable. I mean, you are selling one-fourth of the country. The French suggestion, which carried the day, was that the assets that could be privatized should be placed in a fund in Greece and run by the Greek government under the supervision of the troika (the European Commission, the IMF and the European Central Bank).

These things are symbolic. That is another puzzle in the deal that is actually a pie in the sky. It was in the original program that 50 billion euros would be raised from privatizing [Greece’s] state-owned enterprises, but they managed to raise one billion euros. It is more likely that this plan of raising 50 billion euros will materialize. But even so, to have taken assets and put them in a vehicle outside the jurisdiction of the country — that’s a humiliation and loss of sovereignty — and the French president was influential in avoiding that.

Knowledge@Wharton: How can trust among members of the eurozone, which has been severely damaged, be restored?

Guillen: Trust takes a long time to build. But it only takes a day or even less than a day to destroy — this is the problem with trust. The issue right now is that you cannot trust the Greeks just because they have these crazy negotiating tactics, and they don’t have good statistics about what’s going on in their own economy.

You cannot trust them because they don’t have the state structures, for example, to be able to collect taxes. Tax evasion is a major problem. It’s not something that you can legislate. You need the tax inspectors, the tax collectors, the information systems and everything to be in place — an infrastructure in order to collect taxes. That’s not something that you can create by the end of this month.

[To] build that trust … will take a long time. Now, there is this problem — there is a rift between Greece and the rest of Europe, but there’s also another rift between the hardliners and the rest, with Germany and France being, respectively, the two leading countries in each of those two camps.

The most worrisome thing about Europe right now is that those divisions have gotten bigger over the last 10 years. They haven’t gotten smaller; they’ve gotten way bigger. That is counterintuitive, because the process of European integration was meant to reduce those conflicts and those divisions. In fact, what we are seeing now is that the very process of integration has magnified and exacerbated those differences.

Zenios: From the Greek side, they have to deliver on their reforms. One serious mistake the Greek government had made was, being a new government with a mandate, they rejected all the agreements of the previous governments. But it does not work like this. Of course, a new government has a mandate. But the mandate is not to violate the previous agreements. If they now start living up to their promises, they will restore their part of the trust.

On the European side, especially Germany — it depends how they handle the negotiations for the details of the program. The negotiations will start after Greece enacts some reforms in the next few days. We’ll see how Germany handles that part. Then there is a question on a bridge loan. Greece has asked for a bridge loan to cover this while the negotiation for the 50 billion euros, three-year program is going on.

If Europe appears supportive there, then you will see trust being restored. They have to work together. There is no other way at this point.

Knowledge@Wharton: If you were asked to propose a solution that helps rebuild the Greek economy –- and strengthens rather than weakens its ability to repay its debts – what would you recommend?

Guillen: I’ve been on podcasts and video interviews released by Knowledge@Wharton over the last couple of years, and I continue to say the same things that should be done. Number one is, given that the European Union and the eurozone are relatively tightly integrated in terms of trade, it doesn’t make any sense for every country in the bloc to engage in austerity policies simultaneously.

In other words, I have always advocated for Germany and the other surplus economies — the economies that are doing well — to spend more. The government should spend more and households should spend more, wages should be increased, because part of that spending power would trickle down to the European periphery because the Germans purchase goods and services from Greece or from Spain or from Portugal and so on.

“One serious mistake the Greek government had made was, being a new government with a mandate, they rejected all the agreements of the previous governments.”–Stavros Zenios

The second point is that the European Central Bank should be more aggressive — along the lines of the [actions of the U.S.] Federal Reserve a few years ago, in terms of making sure that the current situation [as it relates to] inflation ends as quickly as possible. Deflation is not only bad for the economy in general, but it’s also bad for people or companies that have accumulated too much debt.

When you have a lot of debt, [inflation] helps you, because you can service the debt with money that is worth less than when you received the loan. But under deflation, the opposite is true. The European Central Bank should be much, much more aggressive.

The third point is a rather obvious one, which is at some point, kicking the can down the road will not be an option. That may be two years from now or five years from now. At that point, Europe needs to decide how many countries are in a position to play by the rules in a monetary union.

[If] you don’t like Greece to be in the monetary union, the question is, what do you do? If you want to be serious about a monetary union in Europe, first, you have to draw a very clear line between the countries that should be part of that union and the countries that shouldn’t. There’s nothing wrong with not being part of the monetary union. Right now, there are nine countries in the European Union that are not part of the eurozone. Many of them are doing really well.

So the issue is to try to avoid the mistakes of the past and to design a monetary union in Europe in such a way that it can be sustainable over the very long run.

Zenios: There are two [aspects] I keep repeating. One is the structured reforms from the original bailout program that had been proposed…. At the same time, [there is the question of] debt relief — Greece [realizing] that the reforms are used to improve the economy and transfer money for the benefit of the people, and not that the reforms are simply to pay back the debt.

It is a well-accepted maxim that if you are bankrupt and never in your life will pay back your debts, then you have no reason to work. But if you have made mistakes, you are bankrupt and you pay the penalty, then at some point, [you should be] free to get back to your economic activity and benefit yourself. One of the major contributions the United States made was with its bankruptcy laws and Chapter 11 to let people get back up on their own feet again. [Greece] needs to get back on its own feet.

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