Athens Has Made Peace With Austerity. Will Europe Make Peace With Athens?

Greek Prime Minister Alexis Tsipras agreed to institute sweeping spending cuts, pension reforms, and new taxes on Thursday, a capitulation that could pave the way for significant debt relief for his near-bankrupt country — and potentially keep Greece in the European monetary union. But opposition in Berlin and Athens could sink the proposal before it has a chance to swim.

After a series of emergency meetings in Brussels, Tsipras agreed to reforms that had been rejected by Greek voters — and strongly opposed by the Greek leader himself — in last Sunday’s referendum on whether to bow to European austerity demands. Now, Greece’s creditors —  the International Monetary Fund, the European Central Bank, and the European Commission — have until Sunday to accept the package. If they don’t, a Grexit, or Greece getting kicked out of the eurozone, could occur.

Tsipras’s acceptance of European demands could put to end a five-year crisis that has rocked world markets, poisoned relations between Athens and its European partners, and raised fundamental questions about the financial pillars on which the euro was built.

But while Tsipras’s concessions clear a major hurdle to a deal, Athens is far from out of the danger zone. Greece’s creditors have to agree to the deal, which has to be approved by European lawmakers across the continent. That could be a tough sell, particularly in Germany, where Chancellor Angela Merkel has consistently taken a hardline with Athens and insisted that it would have to make painful changes to its financial and social welfare systems before Berlin would consider signing off on even a limited bailout.

Many lawmakers from German Chancellor Angela Merkel’s conservative Christian Democratic Union party are prepared to kick Greece out, and a majority of her people are opposed to Greece being pardoned after five years of financial games with the European Union, according to Daniela Schwarzer, the director of the German Marshall Fund’s Europe Program in Berlin. She said they would prefer to give Greece humanitarian aid as its transitions back to its own currency, most likely the drachma it abandoned when it joined the eurozone.

“Many German politicians feel blackmailed,” Schwarzer said. “People no longer believe a fair game is being played.”

Greece is also asking for a so-called “haircut” on its debt, paying less than it owes its European lenders. After IMF chief Christine Lagarde and U.S. Treasury Secretary Jack Lew said Wednesday it would be impossible to keep Greece in the euro without such a move, German Finance Minister Wolfgang Schaeuble said it was something Berlin was willing to consider. But he also said it was unlikely to happen.

“Debt sustainability is not feasible without a haircut and I think the IMF is correct in saying that,” Schaeuble said at a conference in Frankfurt. “There cannot be a haircut because it would infringe the system of the European Union.”

“I think the leeway we have … is very low,” the German finance minister added, saying he was “skeptical” it could be done.

Merkel was more forthright. Speaking to reporters in Sarajevo, she said a haircut is “out of the question for me and that hasn’t changed between yesterday and today.”

There are also widespread concerns across the continent about Tsipras’s ability to institute the changes he is now promising. His people resoundingly rejected European austerity just four days ago. Over the last five years, the Greek government has also shown itself incapable of following in the footsteps of other cash-strapped eurozone members, like Ireland and Portugal, countries that paid back emergency bailout funds provided by Brussels.

The state of play is just as tricky within Greece itself, where lawmakers in Athens have scheduled a vote on the deal on Friday.

Members of Tsipras’s far-left Syriza party are already calling on their colleagues to reject it because the package crosses two “red lines” Greek officials said they would not accept — raising the retirement age along with new taxes on Greece’s business and its wealthy.

Speaking at a business conference Thursday, Greek Energy Minister Panagiotis Lafazanis said, “the choices we have are tough … but the worst, the most humiliating and unbearable is an agreement that will surrender, loot and subjugate our people and this country.”

He added Greece’s “no” vote to European demands “will not be turned into a humiliating ‘yes.'”

One Syriza lawmaker also told Reuters that any package that contained pension reforms, spending cuts, or new taxes would not be acceptable.

Greek reforms might get a warmer reception in other European capitals. France, Spain, and Italy, are credited with helping shepherd Greek negotiators to a deal most of Europe could accept. The latter two countries face their own financial difficulties. If Greece is left out, there are fears Spain could be next.

Under the terms of the reform package Greece submitted just before the midnight deadline, Athens offered to cut public spending by 13 billion euros, or $14.3 billion. It also agreed to change rules allowing early retirement and increase taxes.

Athens has also asked for a third bailout of 53.3 billion euros, or $59 billion. The IMF estimates it would need roughly 50 billion euros, or $55 billion, to cover what it owes and to keep the government solvent.

In exchange, Europeans would consider writing off some of Greece’s debt, according to. European Council President Donald Tusk.

“The realistic proposal from Greece will have to be matched by an equally realistic proposal on debt sustainability from the creditors. Only then will we have a win-win situation,” Tusk said Thursday.

If Europeans accept the Greek proposal, it would cap a series of frenzied talks to keep Athens in the monetary union it joined in 2001. It would also allow Tsipras to pay off the $1.7 billion he is in default to the IMF, as well as the 6.7 billion euros, or $7.5 billion, that Greece owes the European Central Bank over the next two months.

An agreement would also pull Greek banks back from the precipice of bankruptcy. They have been closed since June 29, a day before Athens defaulted on the IMF loan, and will remain so for the duration of the week.

On June 30, the Europe’s $270 billion bailout to Athens expired. So did an emergency line of credit, although the ECB has since lent Greek banks money to keep them afloat.

To stem a run on its banks, Greek officials have limited cash withdrawals to 60 euros, or about $67. Greek pensioners can collect a maximum of 120 euros, or $134. Many ATMs across Greece now sit empty.

John Kirby, a U.S. State Department spokesman, told reporters in Washington Thursday that the United States wants Greek debt to be sustainable. President Barack Obama and Lew have also made a series of phone calls to European leaders in recent weeks, stressing the urgency of resolving the crisis.

On Wednesday, Federal Reserve officials said they were keeping interest rates low because of concerns about the Greek crisis, as well as China’s tanking stock market. Obama insists the American economy is insulated from potential fallout from the Grexit, although no one knows what will happen if Greece leaves because such a move has never happened before.

Global markets appeared optimistic a deal would be struck. Both American and European stock indices traded higher Thursday.

For now, Greece will live to see another day in the euro. And Brussels joins Bretton Woods, New Hampshire, site of the 1944 post-World War II conference where negotiators agreed on how to regulate international finance, and Maastricht, the Dutch city where Europeans agreed to adopt a single currency in 1992, as a location where Europeans met to shape their modern economy.

There’s one key difference, however: Negotiators in Brussels might have also saved it.

Photo Credit: Michele Tantussi/Getty Images