Not over yet

The Greek parliament has approved yet another austerity package. The governments of the euro zone and investors around the world can just about pretend that all is now well. The agreement on Greek reforms, which opens the way for a package of private creditor concessions and new public money, is supposed to bring the country’s debt back to a sustainable level. But, this is little more than wishful thinking. European leaders are sighing with cowardly relief, hoping that they have finally insulated themselves from the Greek problem.

In a way they have. The Greek vote capped a few weeks of gradual easing of tensions in the euro zone’s other fiscally-challenged countries. Yields on Spanish and Italian debt have come down to almost bearable levels. Even Portuguese yields, which spiked at the end of January on fears the country was headed down the Greek path, have dropped by three percentage points this month.

But Greece and Europe are still a long way from safety. Athens is rioting while the country’s political leaders are devoting their energy to expelling from their ranks the MPs who dared vote against the austerity plan. This lays bare Greece’s main problem: the inability of any government to implement its decisions. There is something pathetic in the creditors’ insistence on new government programmes and reforms while they acknowledge the absence of a properly functioning state machine to implement them.

If there is no contagion, the conventional wisdom is that the euro zone could take the pain of a disorderly Greek default or a unilateral exit from the euro zone. The Greek economy is tiny, private creditors won’t have much more to lose after the current deal, and banks are being restructured. But there will still be some Euro 150 billion worth of public loans and, if Athens were to leave the zone, the eurosystem’s Euro 109 billion exposure to the Greek central bank. That’s without counting the adverse impact of the latest austerity plans.

The euro zone, as always, is buying time. It should make sure it uses that time to help pull Greece out of its current death spiral.