Saving the Euro: On the Edge between Dream and Disaster

Alexander Privitera

AGI Non-Resident Senior Fellow

Alexander Privitera a Geoeconomics Non-Resident Senior Fellow at AGI. He is a columnist at BRINK news and professor at Marconi University. He was previously Senior Policy Advisor at the European Banking Federation and was the head of European affairs at Commerzbank AG. He focuses primarily on Germany’s European policies and their impact on relations between the United States and Europe. Previously, Mr. Privitera was the Washington-based correspondent for the leading German news channel, N24. As a journalist, over the past two decades he has been posted to Berlin, Bonn, Brussels, and Rome. Mr. Privitera was born in Rome, Italy, and holds a degree in Political Science (International Relations and Economics) from La Sapienza University in Rome.

The tough negotiations that led to a deal to negotiate another deal between Greece and its creditors can certainly not be described as the finest hour in the history of the European Union. The result of a long weekend of exhausting talks is merely a chance to put things back on track, for Greece as well as the euro zone as a whole.

Some challenges will emerge very soon. Others, potentially bigger ones, need to be addressed with a higher degree of urgency, as it should be abundantly clear to all keen observers of the monetary union that the crisis mechanism put in place since 2010 is part of the problem, not the sought-after sustainable solution.

Let’s start with Greece’s immediate financing needs. Athens owes the European Central Bank (ECB) about €7 billion before the end of August. Furthermore, it is in arrears to the International Monetary Fund by about $2 billion.

European finance ministers are trying to find a way to allow for some bridge financing to keep the country afloat until a final agreement is reached. That will involve more difficult discussions. Is this money part of a bailout deal that does not even exist yet? Or should it be seen as a loan with no strings attached, i.e., with no conditionality? The time to ponder is quite limited as repaying the ECB should be seen as a precondition for allowing the central bank to keep Greece’s banks liquid, at least until the end of the summer, when in all likelihood some of them will be recapitalized and/or resolved. It is obvious that Greek banks are more than vulnerable at this point. Once the immediate financial needs of Greece are addressed, the ECB will take a closer look at how well or badly those financial institutions fare. It’s hard to imagine that they will all get a clean bill of health, or anything even remotely close to it.

In addition, Monday’s agreement needs to pass at least seven other parliaments, where lawmakers are already skeptical about extending Greece yet another lifeline.

Germany’s Bundestag will vote on the mandate to negotiate on Friday (assuming Greece passes it). Lawmakers in the Netherlands, Slovakia, Austria, and Finland will also examine it.

I have little doubt that German chancellor Angela Merkel will get the votes she needs. However, a growing number of her own Christian Democrat lawmakers could desert her, making Merkel look vulnerable within her own party. She will need the vocal support of her finance minister, Wolfgang Schäuble, whose hardline stance during the negotiations may have irritated, even scared, many Europeans as well as some Social Democrats, but is very popular among German conservatives.

Even among creditors, recent days have exposed cracks that will take time to heal. The IMF, for example, will have to determine whether the country’s debt is sustainable before approving more loans.

We haven’t even mentioned the difficulties Greek prime minister Alexis Tsipras will face in Athens, not so much in mustering some temporary cross-party majority, rather in implementing a list of harsh reforms that not even Germany was able to introduce when it was the sick man of Europe. It is certain that Greece has a lot of catching up to do. But expecting and demanding the almost impossible could be a way to merely postpone the whole Grexit debate, surely not the best method to put an end to it. This brings me to the long-term impact of this testing euro zone weekend.

The whole discussion among euro zone leaders about a possible, albeit temporary, Grexit has broken a taboo. No amount of words will manage to get the genie back into the bottle. The talk of a Grexit makes the monetary union reversible.

However, irreversibility can be recovered, but only if Germany and its partners get serious about overhauling the governance of the euro zone. Failing to do so would soil Schäuble’s legacy as a convinced, committed European; Chancellor Merkel would go down in history as the chancellor who not only failed to stop, but also led EU re-nationalization efforts that caused a split, if not worse than the euro zone. Perhaps the past days represent a wakeup call.

Schäuble’s easy talk of a temporary Grexit and the possibility that we might face this debate again seem to have sharpened the minds of some key European partners, at least for now. French president Francois Hollande, who arguably played a crucial role in preventing a Grexit scenario from materializing, has started to talk about deeper euro zone integration, comprising a deeper fiscal union, with a euro zone economic government and a common budget, democratically backed by a euro zone parliament composed of members of national assemblies. If Hollande can make and push concrete proposals, he will no doubt find more than one interlocutor in Berlin. I could even imagine Schäuble secretly rubbing his hands in satisfaction. This would also allow France to get back to its central role as one of the main engines of Europe, something many have waited to happen for all too long in recent years. The Italian finance minister Pier Carlo Padoan stressed that “we are now in the middle of the stream and we can’t stay there. We either go forward or move back.” Italy could back such a forward push. What is needed is to overcome the small-mindedness of recent months. First of all, European governments need to avoid being held hostage by short-term mood swings of European voters. This is one of those moments, when long-term commitments are needed. Of course, if European leaders continue to argue or merely patch up leaks, citizens will grow even more disillusioned with the European vessel and its journey.

In the absence of a political union, mutual trust is the only commodity that will allow Europe to move on the path to a better union. Unfortunately, trust is also the biggest victim of the past few days, and I am not only speaking about the trust between Greece and its creditors. In order to restore it, France and Germany need to go beyond the timid proposals they have made so far to improve the euro area governance. They owe it to all Europeans. If they shy away from their responsibility, the past weekend will indeed be remembered as one of the darkest hours in the still young history of the European Monetary Union.