Is Agreement with Greece the best solution?

The showdown over public debt and reforms between Greece and the Troika – the ECB, the IMF and the European Commission (EC) – has grown since the 2011 sovereign debt crisis at least and has clearly amplified since the far left party Syriza’s President Alexis Tsipras has become Greece’s Prime Minister in January 2015. The endless saga of rumors about the failure or the success of the uncertain talks between the Greek government and its creditors have sent the European financial markets on sharp intraday variations on strong fears that an exit of Greece from the euro area – the “Grexit’” – may announce the beginning of the end for the monetary union as a whole.

Don’t worry however, most of the finance analysts and professionals have repeated so far, Greece and the Troika will reach an agreement and concerns over Greece will disappear overnight. Remember that the 10.8-million-people Greece represents only 2% of the euro area’s total GDP and one suddenly realizes that Greece may not be such a serious issue after all. Not so fast… One first issue about Greece is that whatever the scope of an agreement, the debt will remain huge and there won’t be any guarantee that creditors will be paid back in full or that another crisis like the current one would not emerge again in the future. A second and most important issue is that an agreement with Greece would mean that concessions have been made on the part of Greece but also on the part of the Troika.

Considering the high levels of public debts in several euro area’s States, an agreement could trigger a chain reaction with countries like Italy, Spain, France asking for a similar loosening of their public debt management, this way digging deeper the hole where the euro area has fallen for too long. As a result, by reaching an agreement at all costs, the final cost could be far bigger than expected, namely the disintegration of the euro area in an unstoppable chain reaction of record public debt and wishful thinking about fanciful return to balanced budgets. If an agreement with Greece will certainly reassure the financial markets, this could be another small plaster on a larger hemorrhagic wound. The solution in the short term may not necessarily be the best solution in the long term. Whatever one thinks about austerity, German Finance Minister Wolfgang Schauble has good reason to doubt.