Monday, June 22, 2015

Breakthrough on Greece

There are reports of a breakthrough in Greece debt negotiations today, with both Greece officials and the head of a committee of eurozone finance ministers saying a deal was likely in a few more days. The substance of the breakthrough appears to involve Greece accepting an increase in VAT and the EU accepting that further budget changes in Greece will have to be implemented over time. The core of the deal seems to involve an increase in the retirement age, which is a reform economists (not just me) had been calling for for some time.

Why now? Part of the reason is that, as Donald Tusk put it, “Time’s running out.” But I have to imagine that part of the reason is that the EU just spent two days (and the ECB, a couple of weeks) making contingency plans for a Greek default and agreeing in principle to spend a trillion euros or more if necessary to limit the spread of the resulting damage. This is the only way to explain how the negotiators on the European side moved so quickly and emphatically from insisting on instant reforms to accepting a phase-in of budget reforms. Greece, in response, added a tax increase as a show of sincerity. I think it is that combination of sudden changes in position that led both sides to say, “Now we think we have something.”