The Greek bailout deal resolves nothing
The new bailout deal signals Greece's capitulation to its creditors, something which has important ramifications for the bailout's success. Even if the deal makes it through the Greek parliament in the coming weeks, the programme's economic incoherence will make it fall apart.
Germany's strategy was clear: impose harsh conditions on any government that seeks to change the austere rules of the game, knowing that electorates in Greece and elsewhere are terrified of the leap into the unknown that would be exit from the euro.
But the agreed structural reforms will make little difference to the bailout's success or failure, since they require economic growth, inflation and time to have an impact, and all three are in short supply. Structural reforms will only work if there is sufficient demand in Greece: the agreed austerity will reduce that demand, and thus fiscal policy will destroy the bailout's chances of success.
Since austerity began in 2009, Greece has cut its 'structural balance' - the government balance with the effects of the economic cycle stripped out - by 21 percentage points of GDP, and output fell by 20 per cent, which suggests a one-for-one impact of austerity on GDP.
Before the bailout talks broke down and capital controls were imposed, the European Commission forecast a primary surplus of 2.1 per cent in 2015. But political uncertainty, the closure of banks, and capital controls will have resulted in a renewed plunge in economic activity. Even in the last quarter of 2014 and the first quarter of 2015, which were comparatively politically stable, the Greek economy was back in recession. If we generously assume that the Greek primary balance will be zero this year, Greece will have to raise the primary balance by 3.5 percentage points of GDP over three years.
A government who (it turns out, foolishly) claimed to be ending austerity will now be forced to do the opposite, lowering GDP, raising unemployment, emboldening radicals and fostering further political instability.
Moreover, a fresh round of consolidation will raise the Greek debt-GDP ratio, not lower it. The reason is that the harmful effects of austerity in an economic downturn outweigh the benefits of lowered state spending. 'Confidence' effects, by which austerity advocates claim that business investment rises because investors support fiscal hawkishness, have not been much in evidence so far. And they will in any case be swamped by the continued uncertainty over Greece's euro membership.
The creditors forecast that revenues from privatisation will amount to €50 billion over the course of the loan programme. This is hopelessly optimistic. The current projection, shown by the blue line, is that they will raise less than €1 billion a year. Even the more troika's optimistic forecasts, from April 2014, only predicted revenues of €22.3 billion until 2020.
The lack of trust between the government of Greece and the creditors over the implementation of reforms and adjustment has been a key stumbling block over the course of these latest negotiations - and there is plenty of blame to spread around. The institutions are trying to dispense with trust, by demanding reform commitments before money is disbursed (so-called prior actions) and insisting on stricter supervision by creditor officials. Both are unlikely to work. As the IMF has found out in its own programmes around the world, prior actions do not guarantee implementation beyond superficial legislation, if governments do not really support them, and without growth political support will diminish further.
Greece's third bailout is bound to fail for the same reasons that the last two programmes did. Even if Alexis Tsipras can survive the next round of hostilities in Athens, and fresh elections do not lead to a more radical government in the short term, the bailout's economic incoherence will lead the agreement to unravel eventually.
Greeks will then have ceded further economic sovereignty to creditors who they despise, who seek to pin the blame on the Greek government for the failure of past programmes to generate growth, and who have only marginally adjusted the failed strategy. When the mooted structural reforms fail to lead to recovery, which they will because fiscal policy is pushing the other way, the agreement will fall apart. Grexit is still very much on the table.