Greek debt accord destroys euro illusions

FABIEN ZAMORA, AFP

© AFP/File Aris MessinisThe euro was supposed to be “irreversible”, binding the EU ever closer, but the draconian terms demanded of Greece for a new bailout may have destroyed that illusion forever, analysts said

Brussels (AFP) – The euro was supposed to be “irreversible”, binding the EU ever closer, but the draconian terms demanded of Greece for a new bailout may have destroyed that illusion forever, analysts said Monday.

After marathon talks in Brussels, Germany and other hardline eurozone states backed leftist Greek Prime Minister Alexis Tsipras into a corner — take our offer, they said, complete with intrusive oversight of the economy and public finances, or you are on your own.

It was not supposed to be like that.

At the height of the debt crisis in 2012, European Central Bank chief Mario Draghi said anyone who thought the euro would not survive, badly underestimated the “political capital our leaders have invested in this union and European support for it.”

“The euro is irreversible,” Draghi said, coining a phrase repeated like a mantra, while on Monday European Commission head Jean-Claude Juncker claimed the accord meant the ‘Grexit’ threat had disappeared.

But the talks belie that assertion.

“In case no agreement could be reached, Greece should be offered swift negotiations on a time-out from the euro area,” an earlier draft of the accord read earlier, incorporating a German proposal.

The provision did not make it into the final statement but the damage has been done, analysts said.

– Eurozone now has ‘axe’ –

“The axe is well and truly there,” said Christopher Dembik, an analyst with Saxo Bank.

If the latest plan does not work — and it faces huge obstacles — then the pressure will increase to kick Greece out of the 19-nation eurozone.

“There will be no other choice and we will have put in place a punitive mechanism (for the euro). That is the real political aim” for many countries, notably Germany, Dembik said.

Erik Nielsen, chief economist at UniCredit, said the outcome marked a decisive turning point for the eurozone and Germany’s role in it as the bloc’s most powerful economy and paymaster.

“Germany has crossed the Rubicon for the first time and said that if a government cannot be trusted, it will need to leave the eurozone,” Nielsen said.

Analysts said that prospect has much wider repercussions because if one country can leave, why not another?

“This must now crystallise the risk of a country leaving the euro if they do not adhere to the rules of the monetary union,” said Azad Zangana, senior European economist at Schroders.

“Investors will take note and demand adequate compensation from riskier member states,” Zangana said, referring to the possibility that weaker eurozone states such as Portugal or Italy could run into trouble on the markets when they try to raise funds.

The market response so far to the latest Greek crisis has been very modest but all eyes are on the euro and the borrowing costs for its member states.

– Greece pawn in eurozone game –

Analysts said the Greek stand-off also highlighted another worrying development — a clear split between hardline Germany and a France which took a much more sympathetic line towards Athens and insisted from the start that everything should be done to keep Greece in the single currency.

“Greece was a pawn in the game between France and Germany over the future direction of the eurozone,” said Pawel Tokarski at the German Institute for International Relations and Security Affairs (SWP) in Berlin.

Nielsen at UniCredit agreed, describing how with the former eurozone “power-couple” were parting company.

“This is now about what type of Europe we’ll have in the future, and (its) relative powers -– and this, ultimately, is a battle between Germany and France,” he said.

The two have increasingly different views of what the future should look like, reflecting their different circumstances.

Germany is Europe’s most powerful economy and its public finances are in good order, so Chancellor Angela Merkel champions the same tough austerity and fiscal prudence practiced at home as the only basis for long-term growth.

France in comparison is struggling with weak growth and badly strained public finances, arguing that it needs more flexibility to find the money to help boost the economy.

“France wants flexibility, for member states to be the key decision makers and for the (eurozone) institutions to be weak,” Tokarski said.

“Germany wants a strong, politically neutral European Commission, enforcing clear rules and with very little flexibility in doing so,” he added.

In time, and despite the show of unity put on by France and Germany in securing the Greek accord, such differences will become more pronounced in a “schism between northern and southern Europe,” said Dembik of Saxo Bank.