Euro crisis: “It might be something which would allow Greece also to at least, to some extent, get a new start.”

If the present agreement holds out, the hope in about eight years’ time is that Greece is in a similar position to that of Italy today. But without Italy’s high level of private wealth.

If that does not sound daunting enough, remember that the previous agreements between Greece and the Troika were not short of over-optimistic projections and unfulfilled promises. What was missing? The determination and capability to implement the agreed fiscal and structural reforms and privatisation measures. The current agreement does little to resolve the implementation problem. It is therefore highly unlikely to materially address the lack of effective control by the Greek government over public spending, fundamental weaknesses in public administration (including but not limited to the tax bureaucracy), insufficient savings by Greek households and an uncompetitive non-bank corporate sector. Expecting the agreement to correct these longstanding weaknesses would be a tall order.

The experience with the first Troika programme in Greece over the past 18 months has shown that a solution to the challenges Greece faces cannot be imposed from abroad. It would have to be supported by a broad coalition of the willing in Greece, of which there is little evidence. But until such a coalition materialises, Greece will at best live from review to review in the eurozone. Over the next few days and weeks, investors will undoubtedly greet signs of a greater likelihood of a final signing off on the second bail-out agreement and a completion of the debt swap with minor relief rallies, while retreating at each sign of possible breakdown.

But even with a debt swap, the Greek situation is likely to return to the markets’ attention in a few months at the latest.

At The Irish Economy blog, John McHale points to a recent longer article by the same two authors [pdf file]

[T]he positions of the main EA policymakers seem to have evolved and now suggest a greater willingness by EA creditors and the ECB to support vulnerable, but compliant EA member states under attack. In our view, EA leaders have come to the understanding that the financial, economic and political cost to the whole EA (and indeed to the EU and the global economy) of material EA break-up (that is exit of other nations than Greece) is substantially larger than the cost of extending conditional support. But EA creditor countries have also made increasingly clear that they no longer believe that the costs to the creditor countries of EA break-up or EA exit by one EA country would exceed the costs of creating a one-side fiscal union, a transfer-Europe without a commensurate quid pro quo as regards fiscal austerity and structural reform in the beneficiary countries, underpinned if necessary by far-reaching and unprecedented transfer of fiscal and wider economic sovereignty by the beneficiary countries. The EA creditor countries undoubtedly view the cost of providing unconditional and/or unlimited or open-ended fiscal and financial support to fiscally vulnerable EA countries as a price not worth paying to keep a single non-performing EA member state in the club.

And it would appear that is a growing sentiment…

Luxembourg became the latest of the eurozone’s wealthy “core” countries on Monday to suggest that if Greece left the single currency, it wouldn’t be the end of the world. In fact, finance minister Luc Frieden even broke another taboo, suggesting Athens could actually benefit.

“It might be something which would allow Greece also to at least, to some extent, get a new start. It would help Greece to create an economy that can create jobs,” he said, before adding that of course, as a eurozone finance minister, that wasn’t a scenario he would “prefer”.

The latest figures show that the Greek economy contracted by 7% in 2011 – more than a year after the country was “bailed out” by its eurozone neighbours. By 2013, Greece is expected to have been in outright recession for five consecutive years. That’s not just a downturn, it’s an outright collapse. Yet far from standing shoulder to shoulder with Athens, eurozone ministers are imposing ever more impossible demands. Even if the €130bn (£109bn) bailout Greece needs to meet a bond repayment is released hammering its economy with fresh cuts could push social and political tension to boiling point. “Grexit”, as it’s become known, is looking more likely by the day.

Well, it is serious…  [And “the political trilemma”? – Ed]  Ask Frau Bundeskanzlerin.