Greek crisis: Syriza has finally blinked

Things are now picking up momentum in the run-up to the meeting of European finance ministers tomorrow, and the mood music is changing. The default position of Greece leaving the euro has switched to the possibility that a deal could, after all, be done.

Yesterday, the Greek government delivered its proposals for a three-year financing arrangement, as demanded and expected. For any doubters or anyone still perplexed about the many twists and turns in this saga, Syriza has finally blinked. In correspondence and documents to creditors, the government has made some things quite clear. It wants to ensure that Greece stays in the euro. Less well publicised is a commitment to engage with European and global institutions to help address important governance deficiencies. If intent was all that mattered, this is ground-breaking.

On details, the government is prepared to work towards a primary budget surplus (excluding interest payments) of 3.5 per cent of GDP by 2018. It has agreed to meet most, if not all, of the creditors’ demands on VAT and pension reform, and implement an estimated €13bn of austerity savings in order to get a €53.5bn programme. No formal demand for debt relief has been tabled.

The question then is: will this be enough to get agreement this weekend? Angela Merkel and others have said that Greece needs to offer more than it did two weeks ago. The reason is threefold. The economy has plunged back into recession with estimates that GDP may have fallen by 2 per cent since the banks closed; negotiations are now for a package of €50-75bn, not the last €7.2bn tranche of the now expired second bailout programme; and there has to be agreement on what is required from the Greek government and the ECB to get the banks to re-open, and be restructured and re-capitalised. The Greek proposals may, therefore, not go far enough. Three big issues will dominate the next 48 hours.

First, creditors now have to decide whether to turn a blind eye to the much worse starting point for the new programme, demand more austerity measures, cut Greece some slack on the timetable to a primary surplus, or some combination. If they focus too much on more austerity, Tsipras might well get cold feet. If they don't, it might open a wound between France and Germany. Creditors should also decide on what sort of debt relief they could dangle as a carrot to the Greek government, perhaps as a reward for "good behaviour."

Second, they will have to decide if the total programme size estimated by the Greek government is too small, given what has happened to the economy and to the banking system. Some people are talking about an additional €20-30bn. No country will be willing to subscribe to this—and a half dozen including Germany have to get parliamentary approval—without the most rigorous monitoring and supervision conditions. Even if Germany's legislature approves Merkel's recommendation to accept, others may vote not to do so.

Third, if a deal is reached with Alexis Tsipras’ signature on it, he is going to have to sell this at home to voters who recently voted 61:39 for no more austerity, and to the left wing of Syriza, for whom all this is anathema.

As this eventful week ends, then, the possibility of an agreement has re-emerged. It is not a shoo-in yet. If it is reached, there will be sighs of relief from most people, but we should not imagine for a moment that the Greek crisis has been solved. Regular monitoring of the government’s record on implementation may well give rise to new crises, and the Greek government’s own political position at home may also become more insecure. If an agreement proves too much after the last six months, the words uncharted and waters come to mind.