The new aid program represents both Greece’s final and best opportunity for a prosperous future in the euro area. The country’s early elections, announced last Thursday, are not likely to change this outlook.
The program, under the ESM bailout fund, includes fiscal targets appropriate for the domestic economic situation, the prospects for significant imminent monetary easing and a strong focus on front-loaded, deep structural reform and banking sector restructuring. The chances are therefore good that, with Greece finally on a credible reform and growth track, the euro area can now put the crisis behind it and again look to the future.
It is clear that recent events surrounding Greece will have a lasting impact on the character of the euro. For the first time, Germany and its numerous euro-area allies -- seizing on the negative public verdict in Greece’s referendum on July 5 – explicitly put the option of a member’s exit from the euro area on the table.
Doing so proved to be an extraordinarily effective negotiating technique, compelling Greek Prime Minister Alexis Tsipras to recognize the dangers of his country going off the cliff with his excessive demands.
At the same time, the politically acknowledged possibility of a Greek exit – which, given its catastrophic domestic consequences in Greece, could not possibly have been merely temporary – will have undermined the sense of irreversibility in the euro area. The famous 2012 claims of Mario Draghi, president of the European Central Bank, to do “whatever it takes” to keep the euro together are undermined when top elected leaders threaten the opposite.
The German government and Finance Minister Wolfgang Schäuble in particular must presumably have calculated that the political gains to be had from coercing Mr. Tsipras toward the political center by talking openly about a “Grexit” exceed the potential future complications for monetary policy and the European Central Bank’s planned exit from its €1.1-trillion asset purchasing program in September 2016.
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