Greek crisis: after the "a-Greek-ment", Europe must rebuild trust

"A-Greek-ment" was how European Council President Donald Tusk put it after marathon talks this past weekend. To be clear, what has been agreed is a template for a plan that has to be passed by the Greek parliament by Wednesday. If it is, Angela Merkel will recommend it to the Bundestag for approval, and five other national legislatures must do the same. At that point, the negotiations for a €82-86bn financial programme from the European Stability Mechanism (ESM, Europe’s €500bn bail-out fund) will begin. During the next days, Greece will need bridging loans of up to €7bn to cover debt repayments, and a rise in the so-called Emergency Liquidity Assistance extended by the ECB—a credit line currently standing at €89bn—to Greek banks so that they can re-open, though it will take time before normal services are resumed.

The details of the deal are still emerging after acrimonious exchanges in Brussels and on blogs and social media. To summarise, Greece has had to climb down on almost every issue, including the demand for debt relief, where the agreement says only that upon the first review of the new loan agreement, longer grace periods and maturities may be granted. Greece has agreed to implement changes to its tax and pension systems, which have been the subject of discussion for months, and to which the government agreed in proposals last Thursday. It has also acknowledged that it has to pass reform legislation spanning public administration, product market and labour market liberalisation, and the opening up of closed professions, and to reverse "end-of-austerity" policy changes introduced earlier in violation of the previous loan programme.

Perhaps most sensitive of all, it has to accept the return of Troika monitoring staff to Athens (probably not the most desirable job in the world right now), the involvement of the IMF in the new programme, and the establishment of a €50bn fund of assets. Once privatised, half of the assets are earmarked to pay for the urgent recapitalisation of Greek banks, a quarter to repay debt, and a quarter to finance investment.

In the original German Finance Ministry proposal, the fund was to be set up in Luxembourg, but this has now changed. That plan also included a "dynamite" option, now dropped (from the agreement at least) that if Greece were unwilling or unable to agree to a deal this weekend, it should be offered a five year "time-out" from the eurozone, during which time its debt might be restructured. In other words, a temporary exit.

The logic behind this is still not clear. If Greece were successful outside the euro, with a mega-devaluation and its debt "zeroed," it wouldn’t need to re-enter. It it were not, then it wouldn’t be re-admitted. Either way, the single currency would have been buried and become a fixed but breakable currency arrangement. If the idea was to have Plan B, it was sufficiently ham-fisted to transform the Greek crisis into a full-on existential euro crisis.

It split the 19 countries into three groups: Germany, the Netherlands, and eastern European countries which took the hard line, France and Italy and some others which wanted no part of it, and the rest in between.

So where does this leave things, other than still murky and prone to upset? Many things can still go wrong, but there are two things at least we can conclude.

There is consensus that Greece has gone through five months of totally avoidable economic pain and dysfunction. As a result, the Greek proposals tabled last week did not go far enough to rebuild confidence in the prospects for Greek growth, competitiveness, fiscal balance, and modern public administration. It will be difficult for Alexis Tsipras to swallow the "a-Greek-ment," then sell it to the Parliament and to the OXI (No) voters he stirred up in last week’s referendum. He may succeed in the former with opposition votes, but Syriza may split, and a new coalition may have to be formed. The reaction of citizens is unpredictable.

Tsipras remains very popular and we shall soon see if he is an unreconstructed Marxist biding his time, or if he sees an opportunity now to tack away from the harder left to make a real effort to drive economic and political reform, and introduce some of the key political changes proposed in the Thessaloniki programme on which Syriza came to power. This would of course be under the watchful eye of the dreaded Troika, but in the relative calm of a Europe whose identity Greece craves, and which provides both financial and institutional support.

Set against this, no truer word has been spoken this weekend than when Angela Merkel said that the biggest thing Europe had lost was trust, which it was now urgent to rebuild. If that doesn't happen, and Greece rails against the terms of the deal, the perception of lost fiscal sovereignty, and the uber-intrusion of member states, Greece’s exit from the eurozone has only been postponed. Moreover, loss of trust is at risk of permeating eurozone member states, notably Germany and France, whose different ideas about what the eurozone should be and how it should function may be a sort of diplomatic casus belli. If so, the eurozone’s internal recriminations could yet undermine the integrity of the entire project with unpredictable consequences.

At the 11th hour, Europe did pull back from the brink of losing Greece, but only for now. It’s a long way back.