August 29, 2012
The late-summer diplomacy over Greece is so far having less impact on the country’s future in the eurozone than its economic situation, which continues to change – mostly for the worse, but also in ways that may defy the sceptics.
Antonis Samaras, the Greek prime minister, last week met with German chancellor Angela Merkel and French president François Hollande. They reiterated their broad support for Greece’s place within the single currency, but offered no help beyond the current rescue programme. In particular, they declined – for now – to grant Mr Samaras’s request to stretch out remaining austerity measures over four years instead of two.
This was predictable. Berlin (if not the Bundesbank) and Paris have aligned themselves with the European Central Bank’s preparations to intervene in government bond markets and are well advised to see how that plays out before their next move. Offering Athens anything before the creditor troika finishes its assessment this autumn is politically impossible at home and tactically unwise vis a vis Mr Samaras’s government. If Athens shows it means business, however, the extension should be granted but with no extra funding.
As the wheels of diplomacy whir on, the cogs of the Greek economy are grinding out a new reality. Austerity and a European slowdown have depressed the economy and kept pushing headline deficit goals out of reach. But Athens has done more than many think. Unit labour costs are falling and the primary deficit – before debt service costs – is almost gone.