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10 July 2015

Why Greece backed down on austerity

Alexis Tsipras believes he has no "mandate" to leave the euro and is seeking more ambitious debt relief.

By George Eaton

To many, it feels as if the Greek No never happened. Two hours before last night’s midnight deadline, the Syriza government submitted an economic reform plan to the country’s creditors that offered far greater austerity than before. Alexis Tsipras has backed down on previously intractable issues including a higher VAT rate on restaurants (23 per cent), the removal of tax breaks for most islands, an increase in the retirement age to 67 by 2022, the phasing out of solidarity payments to poor pensioners by 2019, further privatisations, including regional airports and ports, and a smaller rise in corporation tax to 28 per cent (down from 29 per cent). The cumulative level of austerity is €13bn – €4bn more than proposal rejected in last week’s referendum. 

There are two central explanations for this capitulation. The first is that, as Tsipras told Syriza MPs at 8am this morning, “We got a mandate to bring a better deal than the ultimatum that the Eurogroup gave us, but certainly not given a mandate to take Greece out of the eurozone.” He has followed his assertion that the No vote was not a rejection of the euro (which the majority of Greeks continue to support) to its logical conclusion. Had Tsipras not given ground, the country would almost certainly have exited the single currency, an outcome that many EU leaders were prepared to accept. 

The second explanation is Greece’s accompanying demand of a new €53.5bn bailout to cover its debts until 2018 – a far more ambitious proposal than previously made. After the European Council president Donald Tusk and the IMF urged debt relief for the country, there are already signs that Angela Merkel is prepared to moderate her stance. Some, however, fear that she and others may demand even greater austerity from Greece as a punishment for the referendum and Tsipras’s brinkmanship. 

Earlier this week, “Grexit” was regarded as the most likely outcome – but there is now a deal to be done. Whether one is achieved will depend on Tsipras and Merkel successfully overcoming their respective domestic hurdles. The Greek prime minister will likely be able to pass any agreement with opposition support – but at the cost of splitting Syriza. Merkel is confronted by a hundred CDU/CSU MPs who have vowed to vote against another bailout. 

But optimism is greater than at any point this month. The euro has risen to its highest level since 1 July and the yield on Greek two-year bonds has fallen from 55 per cent to 36 per cent – a reflection of investors’ hopes that a deal will indeed be done. For Greece, the question is whether debt relief and further monetary easing will be sufficient to offset the depressive effects of further austerity. If not, the danger is that the cycle merely repeats itself again. 

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