Michael Ioannidis, Max Planck Institute for Comparative Public Law and International Law, Heidelberg

Few elections have as their core issue an international arrangement. The Greek election of 25 January 2015 was one of these exceptions. In 2010 and 2012, Greece agreed with its Eurozone partners and the IMF to accept two large bailout packages conditioned on the fulfilment of far-reaching, austerity-oriented reforms. It also agreed to submit to a monitoring mechanism comprised by officials from the European Commission, the IMF, and the ECB that would supervise its compliance with the conditions and regularly revise them. This monitoring and rule-making structure became known as the Troika.

The second of the bailout agreements, concluded in 2012, was due to expire on 28 February 2015. Unlike Portugal or Ireland, Greece had not established access to the bond market by the end of its Adjustment Programme. Ending international financing support at the end of February would have thus possibly prompted a Greek default.

What the next step should be was put to a national vote on 25 January. Two proposals were presented to the Greek voters. The ruling coalition offered to implement the outstanding part of the 2012 Adjustment Programme and then move on to a successor agreement that would offer Greece further international assistance under softer but still austerity-oriented conditions and Troika-type monitoring. The major opposition party, Syriza, promised a radical break from both austerity and international monitoring and an economic agenda aiming at state-directed and state-supported growth.

The Greek electorate sided with the second alternative and brought to power a coalition of Syriza, as the senior and absolutely dominant partner, and the right-wing ANEL party. As the 28 February deadline approached quickly, the first priority of the new government was to strike an agreement with its Eurozone partners. The new Greek government entered into negotiations with four strategic goals: First, to end austerity policies; second, to end the close supervision of the Troika; third, to replace the current EFSF arrangement with a “bridging arrangement” that would ultimately lead to some form of debt relief; and fourth, to do all of the above and remain a member of the Eurozone. Undoubtedly, this was a herculean task. It became even more difficult at the moment where many of the actors involved in the negotiations seemed more prepared than ever to accept Greece’s exit from the monetary union (or “Grexit”) as an option. Considering that Ireland and Portugal had also been subjected to an Adjustment Programme, but successfully concluded the task, it was now much easier for the proponents of “the infected leg theory” to portray Greece as the singular case of a country beyond repair that had defied the rules, and to make the argument that, unlike 2010 and 2012, the Eurozone was now prepared to absorb the costs of losing a Member.

1. Between strictness and flexibility

Indeed, a lot has changed since 2010. The crisis produced a fully-fledged legal framework that governs financial assistance to Eurozone members. The European Stability Mechanism (ESM), the European financial organization that replaced the European Financial Stability Facility (EFSF) and the European Financial Stabilisation Mechanism (EFSM), has a variety of assistance instruments at its disposal to assist countries in distress, and the ECB seems ready to do «whatever it takes» to save the euro. EU Regulation 472/2013 sets out in detail the EU rules that govern the procedures for awarding financial assistance, and the Court of Justice has offered a set of milestone pronouncements on the constitutional questions of financial assistance. A lot can be said about the functionality of this framework and its compatibility with basic principles of the EU constitutional order. Certainly, the current regime is problematic in many respects, including with regard to parliamentarian control, the protection of fundamental rights, and the division of competences between the EU and the Member States – issues that cannot be further discussed here. In any case, a framework now exists setting the substantive and procedural rules on which financial assistance is granted.

At the centre of this new framework lies the concept of strict conditionality. As explained elsewhere, conditionality is the basic concept of financial-assistance governance. Article 136 TFEU, after its amendment in 2011, requires that «the granting of any required financial assistance under the [European Stability] mechanism will be made subject to strict conditionality» (para. 3). In Pringle, the ECJ found that strict conditionality was a necessary condition for any assistance under EU law and Article 125 TFEU, in particular (paras. 72, 111). And the ECB announced that it will require the implementation of « strict and effective conditionality» in order to activate both its Outright Monetary Transactions (OMT) Programme and its Quantitative Easing (QE) policy (Article 2 (3) (d) Decision 2015/10 of the ECB) (on these issues see the posts by D’Acunto and Cafaro in this Blog).

So far, all Member States that have received financial support have subscribed to an Economic Adjustment Programme (EAP) that prescribes, sometimes in minute detail, the conditions under which assistance is provided. While these Programmes’ intrusiveness and the number of their conditions vary, they generally do not only require fiscal consolidation, but also structural reforms of public administration, pension, education, and tax systems. The EAP conditions involve a strange breed of consensus and coercion. They are supposed to reflect the agreement between the Troika and the recipient country, but often the dire need of recipient countries for financial support tilts the balance decisively in favour of the Troika.

Legally, the relevant conditionality takes three forms. First, it is detailed in a Memorandum of Understanding (MoU), which is annexed to the Financial Assistance Facility Agreement concluded between the Member State and the EFSF (or ESM, EFSM, depending on the case). Second, the most important of the conditions are included in Decisions of the Council addressed to the recipient Member State and adopted on the basis of Articles 126 (6), 126 (9), and 136 TFEU, EU Regulation 407/2010 (depending on the mechanism activated) and, after the adoption of the Two Pack, EU Regulation 472/2013. Third, conditions (again in the form of a MoU) are attached to a Letter of Intent directed to the IMF Managing Director. According to Article 7 (4) and (5) EU Regulation 472/2013, the Troika is responsible for supervising the implementation of the conditions and for revising them. Final decisions on compliance with conditionality and changes to its content are taken by the Council (Article 7 (5) and (7) EU Regulation 472/2013). Apart from its economic “strictness’’, financial assistance conditionality has, thus, gradually become “stricter” also in legal and institutional terms. For countries in a financial assistance programme, arguments on economic and social issues need to take a particular form and to be channelled through particular procedures in order to be relevant.

In the latest stage of the Greek drama, the crux of the matter was how much flexibility could fit into this “strict conditionality”. Flexibility has, indeed, become a critical point for EU economic governance. In January, the Commission presented its Communication Making the Best Use of the Flexibility within the Existing Rules of the Stability and Growth Pact, which deals with discretion, within the agreed rules, «for the Commission and the Council to assess the soundness of public finances in the light of country-specific circumstances». Flexibility was also one of the words most often used during the latest negotiations. Greece, like all other countries accepting assistance, was bound to an Economic Adjustment Programme that required austerity and supply-side reforms, while the new government was elected based on the promise that it would repeal austerity-driven measures and focus on demand-side policies. The negotiations that followed would test flexibility on three fronts: first, how much a newly elected domestic government can deviate from the promises to which a country has already subscribed; second, what leeway is left from the central EU economic priorities as specified by the Eurogroup and the Troika; third, how much the legal and institutional framework described above can be softened and replaced by some form of “political negotiation”.

 2. The agreement

Negotiations between Greece and its Eurozone partners reached dramatic heights more than once. Uncertainty during this stage drove Greek depositors to make massive withdrawals from their bank savings, bringing Greek banks to the brink of collapse and reportedly causing the ECB to consider the imposition of capital controls. The spectre of a “Grexit” once more loomed large over Europe.

Ultimately, at the eleventh hour, an agreement was reached to extend the Greek bailout Programme for an additional four-month period, until 30 June 2015. The agreement has two parts. The first was set out in the Eurogroup statement of 20 February 2015 and the second took the form of a complementary list of planned reforms, which was sent by the Greek government to its Eurozone partners on 23 February 2015.

The final decision on the extension was taken by the Eurogroup on 24 February 2015. Formal approval was given by the Board of Directors of the EFSF on 27 February 2014. In some instances, the agreement was ratified by national parliaments – but not in Greece.

Technically, the agreement is the third amendment of the Master Financial Assistance Facility Agreement (MFFA), initially concluded between Greece and the EFSF on 15 March 2012. The amendment is clear on two things. It changes the expiry date and also requires that the €10.9 billion held by the Hellenic Financial Stability Fund (HFSF) to cover potential bank recapitalisation and resolution costs be returned to the EFSF. This sum can now be released to Greece only on request by the ECB (in its capacity as bank supervisor). This means that the first declared goal of the Greek government, i.e. to enter a totally new arrangement and replace the financial-assistance procedures by a “non-technocratic”, political negotiation at high level, was not achieved. The new agreement is an extension of the old one and it is governed by the same basic rules and principles. The same happened in the case of the second goal, i.e. to activate a procedure that would lead to some form of debt relief. According to the Eurogroup statement, the Greek authorities reiterated «their unequivocal commitment to honour their financial obligations to all their creditors fully and timely». At least in the short term, Greek plans for some form of debt redemption, thus, had to be shelved.

The most important point, however, in the struggle between “strictness” and “flexibility” concerns the changes the Greek government achieved (or did not achieve) regarding conditionality. There, the picture is more blurred. The Eurogroup statement and the subsequent list of reforms leave many things open. This vagueness, that meant to allow parties to communicate the agreement easier to their constituencies, may eventually strengthen the position of the Troika, which will be called on to monitor its implementation.

2.1 Ownership of conditionality

It is unclear how much the February agreement changed the ownership of conditionality. According to the Eurogroup statement, conditions will be «based on» the old conditions and, as previously stated, Greece had to offer its own list of priorities on 23 February 2015. How much of the old Adjustment Programme will survive remains to be seen. In their announcements, the ECB, the IMF, and the EFSF were adamant that they will continue operating on the basis of the old, pre-election understanding of conditionality.

Greece, however, won flexibility regarding the 2015 primary surplus target. This will be modified downwards from its previously agreed level to «take the economic circumstances in 2015 into account». Regarding old measures, the Greek Government had to revise its promise to cancel many of the austerity measures it heavily criticized since 2010 as an opposition party, agreeing to «refrain from any rollback of measures and unilateral changes to the policies and structural reforms that would negatively impact fiscal targets, economic recovery or financial stability, as assessed by the institutions». In this context, “economic recovery” is broad enough to cover any type of measure agreed upon since 2010. Finally, the agreement endorses the intention of the Greek government to give priority to rule-of-law and State-building reforms by «implementing long overdue reforms to tackle corruption and tax evasion, and improving the efficiency of the public sector». This is an important advance. As some of us have argued, rule-of-law deficiencies have contributed significantly to the crisis and deserve a much greater focus in the Adjustment Programmes.

2.2 Troika

Although it is now commonly called “Institutions” or “Brussels Group”, the Troika will remain in charge. In its previous function, the Troika has been quite intrusive and its frequent visits to Athens, Lisbon, or Nicosia sparked heated reactions. It appears that the future meetings of the Troika bureaucrats with Greek officials will be less frequent and more discrete (maybe in Brussels). The degree of the “Institutions’” actual involvement in Greek policies is yet to be seen. In any case, the essence of the Troika as an atypical structure through which representatives of the IMF, the ECB, and the Commission supervise the implementation of the conditions of the bailout Programme, remains the same. There is, however, a real danger that the new arrangement will make the workings of the Troika even more obscure. One can assume that the Troika will continue to exert pressure and affect policies, but this influence will not be disclosed by fear of bringing the “T-word” back to the public discourse. Instead of “hiding” Troika, however, the best solution would be to publicly expose it as one of the actors that shape Greek economic and social policies, and, to legally institutionalize its procedures. For good or for bad, the Troika has an important say in many important policy fields in Greece and elsewhere. It should have to publicly expose its arguments and proposals to critical contestation.

In the long term, the Greek opposition to the Troika might trigger a greater reform of the mechanism supervising financial assistance conditionality. In the last years, many actors, including the European Parliament and the Commission, shared the view that the Troika is in need of radical reform. In his recent Opinion on the OMT case, AG Cruz Villalón criticized the potential conflict of interest arising by the participation of the ECB in the Troika, when ESM/EFSF runs parallel to OMT (para. 150). AG Cruz Villalón was very careful to restrict his objections to the current scheme of the Troika only in case the OMT mechanism is activated. Although he was adamant that the Troika may still include the ECB when it supervises “simple” EFSF/ESM assistance, such as the case in Greece, there are serious arguments questioning the compatibility of the participation of the ECB in the making of economic policy with its mandate.

2.3 The Eurogroup and the ECB

A note on the most recent stage of the Greek drama would not be complete without a reference to its protagonists. The Eurogroup was the formal forum of the negotiations, but decisions have been largely crafted by bilateral Greek-German negotiations. Before the Eurogroup on 20 February took place, in separate rooms the Greek and the German finance minister exchanged drafts for several hours with the participation of the Eurogroup president, Jeroen Dijsselbloem and the IMF Managing Director, Christine Lagarde. Direct communications between Prime Minister Tsipras and Chancellor Merkel were also instrumental in reaching an agreement.

Leading was also the role of the ECB, which had some very strong cards to play. On 4 February 2015, the ECB lifted the waiver affecting marketable debt instruments issued or fully guaranteed by Greece that until then allowed Greek banks to benefit from cheap liquidity. As a result of this decision, Greek banks, already strained by the run on deposits, became dependent on Emergency Liquidity Assistance (ELA), which is, however, significantly more expensive than regular ECB financing. When the ECB raised the provision of ELA very modestly by 3.3 billion euro on 18 February 2015 (when outflows of deposits from Greek banks were reaching record heights), everybody knew that this was an ultimatum: either Greece should strike an agreement within days or it would have to face very serious bank problems. As in the cases of Ireland and Cyprus crises, the ELA was again used as pressure to bring about a quick agreement.

After the announcement of the Public Sector Asset Purchase Programme (PSPP), through which it implements its QE policy, the ECB has now another strong card to play against recalcitrant governments. According to Article 3 (2) d of Decision ECB/2015/10, for Member States under an ongoing financial assistance programme, such as Greece, eligibility for public sector asset purchases «shall be suspended and shall resume only in the event of a positive outcome of the review». In effect, a review without a positive outcome means exclusion from the largest monetary mechanism ever designed in Europe.

3. Outlook

On 20 February a major act was played, but the Greek drama is far from over. Opponents of austerity should wait to celebrate a victory. “Strict conditionality” seems to be stricter than many actors thought, especially in Greece. It seems that the Greek negotiation did not change the core of the Adjustment Programme and stayed within the basic economic and institutional contours of financial-assistance conditionality. The future concretization of the agreement will show how much domestic determination is compatible with financial assistance within the Eurozone and whether the Greek government can fulfil its promises to the other Eurozone members and at the same time retain the necessary parliamentary and social support at home. This will definitively keep open the fundamental question of democratic legitimacy of the new EU economic governance. During the negotiations, the Greek government strongly played the card of its fresh electoral mandate. But when the other eighteen Eurozone governments became Greece’s creditors they also assumed a significant stake in the financial affairs of Greece. How to consolidate these two often competing interests and through which procedures will remain one of the difficult tasks during the months to come.