The Deal Europe Should Make

Is this how the euro ends?

Photographer: Milos Bicanski

When the euro system's leaders meet Monday night, the fate of the single currency and the larger European project will be in their hands. Greece and its creditors can finally start to undo the damage of recent months -- or else refuse to budge, and gamble on fatally undermining the whole European venture.

Putting things right will be hard because no trust remains between Greece's government and the others. Yet the situation can still be retrieved. The purblind rigidity and casting of insults -- there's been plenty of each from both sides -- have to stop. The discussion must set aside narrow technicalities and rise to the larger political ambitions at stake.

Greece's Fiscal Odyssey

Three principles need to be uppermost.

First, the creditors should recognize that their disgust at a reckless government given to terms such as "pillaging," "criminal" and "terror" in speaking of its partners doesn't justify punishing the Greek people or putting their own economies at risk.  

Second, they should admit that Greek Prime Minister Alexis Tsipras is correct on one vital point: The current bailout program rescued Greece's creditors but condemned his country to long-term penury. It has failed. Even the International Monetary Fund acknowledges that it cannot work without further debt restructuring.

Third, every road out of this mess is going to be expensive for both sides. The challenge is to minimize the costs, broadly understood, then explain the reasoning to voters who may be skeptical or downright hostile.

To do this, Europe's leaders need to think big, and weigh the possible consequences of an ugly European divorce both in terms of economic contagion and geopolitical damage. They should reflect on some history. The Cold War started when U.S. President Harry S Truman resisted the Soviet threat to Greece; last week, Tsipras went to Russia to sign a deal for a jointly-owned natural gas pipeline that the the European Union says would be a breach of its rules.

Applying the three principles, Greece's creditors should release the remainder of the current bailout funds to keep Greece afloat through the summer and offer further debt relief as a part of a new long term deal. In return, Greece must accept demanding euro area fiscal economic reform conditions applying to rest of this year and beyond. But since Syriza is not to be trusted, the creditors should also attach a new string. For the deal to be done, Tsipras must agree to hold a referendum at the earliest possible date (with wording acceptable to the creditors) that puts a clear choice to Greek voters: Accept these terms in full, and stay in the euro system; or reject them, and quit.

Tsipras ought to have done this already at his own initiative. He has no mandate to take Greece out of the euro system, or even to default, though his scorched-earth negotiating tactics suggest he thinks otherwise. Most Greeks want neither of those things. In any event, the creditors need assurance that the country is committed to honor the undertakings in the new program. Tsipras and his government have no credibility left. Their word is no longer good enough.

As part of this new compact, an explicit write-down of Greek debt would be best, but that may be politically impossible for Germany and some others. Instead, a further extension of Greek debt maturities and lower interest payments -- there are many ways of packaging it -- could suffice along with the budget conditions to make Greece's fiscal position both politically and fiscally sustainable. If the IMF, a creditor in its own right, is unwilling to go along, Europe's governments should assume its share of the debt. Its loans should never have been sought in the first place. Geopolitical calculations about Europe's future aren’t within its remit or competence.

Involving the IMF was only one of many errors. The whole saga is one of mistakes doubling down on mistakes. It's way past time to break that sequence.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.