Greek bailout: What happens now?

The third bailout agreement between Greece and its creditors has averted, for the time being, a catastrophic outcome for Greece and a deeply traumatic one for the euro zone — a "Grexit." The agreement keeps Greece in the euro but at great cost to the country, while having important implications for the euro zone.

Alexis Tsipras, Greece's prime minister, center, reacts as he leaves following all-night bailout talks in Brussels, July 13, 2015.
Jasper Juinen | Bloomberg | Getty Images
Alexis Tsipras, Greece's prime minister, center, reacts as he leaves following all-night bailout talks in Brussels, July 13, 2015.

First, the agreement is yet another version of "extend and pretend." More help (in the form of loans) is extended by creditors, while pretending that the Greek crisis is being addressed. What is still not conceded is that Greece cannot get itself out of its current plight without debt restructuring. Economic history shows that, indeed, highly indebted countries cannot move forward without significant debt write-downs of the "classic" kind German Chancellor Angela Merkel refuses to consider. Greek debt is simply too high for it to be paid back by an economy that has lost 25 percent of its GDP in the last five years and keeps shrinking. Austerity will continue and Greeks will see their incomes further reduced. Unemployment is unlikely to come down once recessionary measures, like the ones agreed, are enacted.

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The radical left-wing Greek government will pretend to implement reforms it does not believe in. Syriza's raison d' etre has been to fight against austerity and pro-market reforms, and push for state expansion. How can its government own up to a program it has always resoundingly protested against? Already 15 Syriza members of parliament who voted for authorizing the Greek government to conclude the bailout agreement have already committed themselves publicly to oppose relevant legislation that will enact specific measures. Prominent ministers in the Tsipras government have either openly opposed the third bailout or stated that it diverges from their party's commitments.

The political fallout from the third bailout will be significant. It will be significant for Greece since it will likely lead to the split of Syriza and the breakup of its coalition with the populist right-wing Anel party. Several Syriza MPs will either resign or simply leave the party, costing the government its parliamentary majority. Most likely, elections will follow and an important realignment of Greek politics will take place.

Prime Minister Tsipras is still the most powerful politician in Greece and people trust him for standing up to creditors to the last moment. That his decisions in the last six months — especially in the last two weeks — surprising creditors with his call for a misconceived referendum, had negative effects on the economy and led to an extensive closure of Greek banks, thus making the terms of the bailout agreement particularly harsh, is something that will not dramatically affect Mr. Tsipras' standing among his strongest supporters.

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However, within the public opinion at large, his reputation will be dented, especially after he starts defending the laws that will implement the bailout agreement in parliament. His humiliating compromise with creditors is likely to be the beginning of a journey towards political moderation for him. Can he pursue it to the end? Can he complete his turn towards the center, transforming a radical left to a social democratic party, when throughout his career he has been an adamant leftist? History suggests that it is possible (look at former President Lula in Brazil, for example), although it is far from a foregone conclusion. However, for Tsipras to survive politically he has no choice but to move his party to the center-left. Such a move will leave space for anti-austerity politicians.

Insofar as austerity is being continued and Greek misery sees no end, Tsipras' former comrades will step up to take the anti-austerity mantle. Since Tsipras' strategy of fighting austerity by negotiating hard with creditors, while keeping the country in the euro, has failed, anti-austerity politicians are likely now to change strategy. Their new position will most probably be to directly fight Greek membership of the euro, arguing explicitly for a return to the drachma.

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The third bailout agreement will reinforce the hitherto marginal voices arguing for Greece exiting the euro of its own will. Moreover, it will strengthen nationalist sentiments, reinforcing the historical belief in Greece that, yet again, the country is a victim of big powers. It should not be surprising if such a development is couched in anti-Germanic language. Greek suspicion of austere Germany will not be diminished.

The third bailout deal will be significant for Europe, too, since it has become clear that those opposing German orthodoxy will be brutally put down. The start was made in March 2013 with Cyprus being forced to accept a bail-in. Now, with Greece following, a pattern starts becoming noticeable, namely the weaker members of the euro zone cannot pursue their national interests except by subordinating them to Germany's and its allies. The euro zone is going to look like a club run by the mighty and political tensions will intensify. The more the principle of democracy, so strongly upheld in the European Union, and the rules governing the euro zone collide, the more the gap in the European integration project will widen.

Already for many in Europe, Greek capitulation amounts to a fiscal coup against a sovereign country. The third bailout agreement for Greece has exposed as well as created breaches in the European edifice. If they are not repaired, creditors' victory over Greece may have planted the seeds of future discord.

Expect more austerity, more unrest, half-hearted reassurances by the Syriza government that it is committed to reform, a realignment of the Greek political landscape, and further cleavages in the European project. In Greece, already trade unions are up in arms, calling for strikes. It is particularly uncomfortable for Syriza, since it used to be their strongest supporter. And the first Syriza MP has just indicated that he intends to vote against the bailout legislation and leave his parliamentary seat. Others will likely follow.

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What, however, is new this time is the end of illusions for Greek voters: It is increasingly being realized that if a country is determined to stay in the euro zone, there is no alternative but to accept the largely German rules of the game. The political implications of this realization are not easy to predict. It could be that, to the extent the TINA (there is no alternative) doctrine is widely accepted, social unrest is contained. But it could also be assumed that the absence of an alternative may make people more extreme in their political choices. At any rate, one thing is certain: The third bailout program is no mere fiscal agreement but a profoundly political, one-sided deal that is going to shape the future of Greece and the euro zone.

Commentary by Haridimos Tsoukas, a Distinguished Research Environment Professor of Organization Studies at the Warwick Business School. He also holds the Columbia Ship Management Chair in Strategic Management at the University of Cyprus. He is a co-editor of "From Stagnation to Forced Adjustment: Reforms in Greece, 1974-2010."