It’s too soon to say who won Greece versus Europe

Some readers have reminded me about my recent post, “Why Europe Will Cave to Greece.” Europe didn’t cave, they smile — Greece caved to Europe.

Well, it’s true, things haven’t gone as I expected when I wrote that post at the end of January. You can count on dysfunction in the European Union, but rarely to this degree. Still, it’s too early to say who caved to whom. The most one can say at the moment is that this is no way to run a monetary union.

The outcome of the negotiations was prefigured at the end of last week by Greek Finance Minister Yanis Varoufakis, who said he was asking Europe to meet him «not half-way but one- fifth of the way.” That’s about what happened — though in judging who gave way and how far, a lot depends on what was really at stake.

Before arriving at the recent impasse, Greece had already abandoned its demands for outright debt write-downs, deliverance from the “troika” (the European Commission, the European Central Bank and International Monetary Fund), and a clean exit from its bailout program. That was capitulation of a sort, but not so consequential, because it was more about abandoning political postures than making real concessions. Substantively, less ground was yielded than you might think.

Outright debt forgiveness? It would be better if the creditors granted this and, in the end, they probably will. But in the meantime there are other ways to provide relief (extended maturities, lower interest rates, yields linked to growth in gross domestic product, and so forth). These alternatives are still on the table.

No more troika? Monday night’s proposals were indeed submitted to “the institutions,” but even here, notice that Monday’s letter from Varoufakis talks about doing things in agreement with the institutions, not about accepting their instructions. Earlier in the month, he’d already said: “Our citizens have rejected the role of the ‘troika’ in Greece. Our government will however maintain dialogue and continue to cooperate fully with the European Commission, the ECB and the IMF as a member country of the European Union.”

Also, the institutions aren’t happy. To deal with the immediate danger, they’ve accepted the vacuous language of the euro group statement — which says the latest Greek proposal “is sufficiently comprehensive to be a valid starting point for a successful conclusion to the review” — but have big reservations. The IMF says, “In quite a few areas, however, including perhaps the most important ones, the letter is not conveying clear assurances that the Government intends to undertake the reforms envisaged in the Memorandum on Economic and Financial Policies.”

In short, Greece hasn’t really submitted to the judgment of the troika — and if it had, the troika would apparently have rejected its offer.

Finally, is this a clean exit from the bailout program? Depends what you mean by clean. Whether the next few months of financial support, if it’s granted, amount to an extension of the bailout, a loan extension but not a program extension, a bridging arrangement, a successful conclusion of the existing review, a provisionally valid starting-point for a preliminary discussion of tentatively extended bridging memorandum with flexibility according to the circumstances, is doubtless fascinating to some. Between now and Greece’s new program, all that matters to Varoufakis & Co. is that they aren’t bound by each and every promise made by their predecessors, and that they can find the cash to meet Greece’s next few months of debt- service obligations.

At the end of last week, Greece was threatened with a cessation of the necessary liquidity support unless it committed unconditionally to the existing program. It hasn’t made that commitment; the principle that flexibility will be shown during the transition to the new program appears to have been accepted; and the financial threat has been lifted — for now.

You could say neither side has caved, because nothing is decided. The immediate danger of a run on Greek banks may have eased, but could resume at any point. Discussions on the short- term relief will continue and talks on the new program haven’t even started.

Here’s the main thing: This was a crisis, still unresolved, that was willed in the first place by the euro zone’s leaders. There was no need to let it happen. Greece could and should have been calmly granted a financial breathing space to negotiate a successor program weeks ago.

It’s mismanagement on a remarkable scale. I admit I was wrong. I just hadn’t understood what Europe’s leaders were capable of. [Bloomberg]