What’s not clear yet is just how far Tsipras is willing to climb down, and how much other European governments will demand of him. Although this is a strong signal that the two sides will make a short-term deal, it’s only a tentative agreement. Before an actual deal can be struck to continue rolling over Greece’s maturing debts and holding open the central bank credit lines to Greek banks that keep them liquid in euros, Greece’s troika of official creditors must still review and approve a preliminary fiscal plan that Tsipras is supposed to produce before midnight on Monday.
To continue receiving support in May and June, the Greek government must win approval of a more detailed fiscal plan, and to continue getting aid after that, the Greek government must agree a new adjustment program.
The component of the tentative deal that has received the most attention is that European governments will back off from their previous expectation that Greece would run a 3% of GDP primary surplus this year. A statement issued by the Eurogroup after its meeting on Friday said creditors will adjust the target to “take the economic circumstances into account.”
But Greece has been allowed to miss fiscal targets due to worse-than-forecast economic performance every year since 2010, and this year would have been no exception even if the previous government of Antonis Samaras had stayed in power. The target was premised on forecasts of 2.9% real GDP growth and 3.3% nominal GDP growth, which were very optimistic even before the recent collapse of Greece’s package-tour sales to Russia.
As I’ve written, the real test for Greece is whether it can get its fiscal balance back to where it was in January-November of last year, before tax collections plummeted during the election campaign. This tentative deal gives the new Greek government some breathing room, but it sets up a tight schedule for Tsipras to put forward acceptable fiscal plans.
Predicting what Tsipras will do is difficult because he is telling one thing to European leaders and another thing to Greek audiences. In a televised appearance on Friday, he said Greece “took a decisive step, leaving austerity, the bailouts and the troika,” but “won a battle, not the war. The difficulties, the real difficulties ... are ahead of us.” But according to the Eurogroup, Tsipras agreed to continue giving the troika a veto over Greek fiscal policies. As the statement put it, “the Greek authorities commit to refrain from any rollback of measures and unilateral changes to the policies and structural reforms that would negatively impact fiscal targets, economic recovery or financial stability, as assessed by the institutions.”
The Eurogroup however made a small, symbolic concession by referring to the troika throughout its statement as “the institutions,” apparently to help Tsipras pretend he wasn’t breaking a campaign pledge not to cooperate with them.
As for the details of the fiscal plan, the Eurogroup statement made it sound like governments would let the troika’s permanent mission in Athens decide whether they’re credible. It said the preliminary fiscal plan would be reviewed “on the basis of the conditions in the current arrangement” – that is, the latest fiscal plans agreed between the troika and the Samaras government – but “making best use of the given flexibility which will be considered jointly with the Greek authorities and the institutions.”
Just how much flexibility the troika mission will be told is “given” is anybody’s guess. The Greek government’s team in Brussels handed out written comments to journalists after the Friday meeting saying the government would not have to make the tax increases and pension cuts that the former government had promised.
Having made this tentative deal, I would be surprised if Tsipras can’t come up with a plan credible enough to convince European governments to roll over debts coming due through April. But Tsipras has made a lot of populist promises to cut taxes and roll back budget and salary cuts, which will make it very hard for him to get back to even a zero primary fiscal balance after January’s disastrous 20% shortfall of state budget revenues. I doubt the deal will hold.
Looking at the bigger picture, Greece has undergone a large and traumatic internal devaluation since 2010, but it’s still not competitive enough to expect bounce-back growth. It reported a small amount of real growth last year but nominal GDP still shrank. There’s little reason to think Greece can rapidly re-employ its huge numbers of unemployed. Greece is still trapped, unable to get out of austerity without leaving the euro, but more afraid of leaving the euro.
Is Tsipras willing to do exactly the opposite of what he promised? Is he willing to fiscally tighten when he promised to loosen? He has shown that he’s willing to extend the troika’s veto over Greek economic policies while claiming on national television to have parted ways with the troika. We’ll see.
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