Over the next nine days, Greece will try to implement the harsh conditions attached to the 130-billion euro bailout put together by other European Union members. The markets have given a tepid response because of their concern that an embattled Athens will be unable to fulfill its obligations.
The European Union has brought the horse to water — even creating the water in the first place — but has no means to ensure it drinks. There has also been a slow realisation that even with the bailout, and factoring in rosy forecasts about future Greek economic growth, Greece will still emerge with a public debt of 120% of gross domestic product. That is lower than its present debt levels of nearly 170%, but still unsustainable. Greece has no capacity to export goods or services, no large remittance sources and no gilt manna from heaven is expected.
This does not mean the bailout is little more than sound, fury and financial statistics signifying nothing. What the long tortured negotiations between the north European nations paying for the bailout and the political violence endured by Greeks the past several weeks have done is buy time. Remember that the world-busting threat that the eurozone crisis posed was the domino effect of a Greek bankruptcy.
This would have meant the economies of Italy, Spain, Portugal and various east European nations falling off the same red ink cliff. The result would have been a banking meltdown of global proportions, possibly exceeding the damage of the subprime crisis. This threat has become a past nightmare rather than an expected reality. Italy and Spain have been able to sell billions of new government bonds at near-normal interest rates the past few weeks. European banks have massively reduced their exposure to the riskiest government debt. Thus most major banks were able last month to submit credible plans fulfilling the European Banking Authority’s core tier one capital targets. This indicates that the worst case scenarios of a Europe-wide financial earthquake are now highly unlikely.
Europe may be out of danger, but that still leaves Greece. It seems almost certain that the European Union has decided Greece cannot be cured and should therefore be economically quarantined. It will be given the odd financial sop in return for being exiled to a future of austerity, debts and social unrest for years to come.
The hope will be that it will emerge from this at some point. But the practical purpose of the bailout is to create an environment where Greece will no longer threaten the rest of the world. Further moves to build a wall around Greece can be expected — perhaps through the International Monetary Fund or multilateral fora. Greeks will have reason to be wary of non-Greeks bearing gifts in the future. But for the rest of us, the result is a welcome respite from two years of economic tension.