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Greece's new deal with Europe, explained

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  1. Greece appears to have reached a deal with European Union finance ministers on an agenda of political and social reforms.
  2. In exchange for the reforms, Greece's EU partners will keep the country's government solvent for the foreseeable future.
  3. The deal still requires signoff from the European Central Bank and the IMF, and ultimately will need to be approved by national parliaments.
  4. But this initial hurdle was considered the steepest one to climb, and the Greek stock market soared on the news.
  5. The deal represents Syriza substantially abandoning the "radical left" elements of its agenda, while still offering a substantial change in direction relative to the status quo.

What is in the deal?

You can read the six page memo for yourself. But the key reforms promised here mostly relate to the tax code and tax administration. Before the financial crisis, Greece was essentially running a European-style level of public spending with an American-style level of tax collection. The area where Greece's new left-wing government and Greece's European partners have the most room for common ground is on trying to raise Greek tax revenue. This is where Syriza's reform promises are most specific and enthusiastic.

Syriza also promises to crack down on several dimensions of corruption, including promises to reduce civil service spending on things other than wages and pensions. For a flavor of what this means, even as the Greek stock exchange boomed on the news of the deal, shares in Greece's number one office furniture company tanked.

Elsewhere the deal largely reflects Syriza abandoning campaign promises and replacing them with verbal wiggle room about maybe doing things later. A promised doubling of the minimum wage is postponed indefinitely, and proposed rollbacks of changes to collective bargaining is turned into a proposal for "a new ‘smart' approach to collective wage bargaining that balances the needs for flexibility with fairness."

The new Greek government also promises not to renege on privatizations that are already in progress, but affords itself the opportunity to slow down or perhaps avoid any future privatizations.

Last but by no means least, the memo pays lip service to Syriza's promises to increase social spending to alleviate the humanitarian crisis in Greece. But it also commits Syriza to balanced budgets. Consequently, their ability to deliver on this in practice is going to be very linked to their ability to actually increase tax revenue.

Who won?

The standoff is often portrayed as a kind of zero-sum conflict between Germany and Greece. In that view, Germany pretty clearly "won" as Greece has little objective leverage. But in the real world, public policy is not zero sum and both Germany and Greece would benefit from improved policy in Greece and suffer from bad policy.

In that view, this is a decent deal. The old arrangement in which a grand coalition of Greece's two long-governing parties were supposed to tackle the systematic corruption that they had created made very little sense. The questionable reform agenda was undergirded by extremely tight demands for budget surpluses, and the insistence on privatization risked becoming a fire sale of potentially valuable assets.

Into the breach stepped Syriza, a far-left political party with roots in Greek Communism that had never governed before.

The deal Syriza has now agreed to substantially undercuts the radical left elements of the Syriza agenda. At the same time, it does represent a more flexible approach to budgeting and what looks like a more sensible path to reform. There is absolutely no guarantee that the new Greek government will be able to actually deliver on tax reform and anti-corruption measures that have been promised, but it's at least plausible in a way that sticking with the old team wasn't. Meanwhile, Syriza has earned some flexibility on budgeting and the implementation of privatization. It's not the dawn of a whole new era of economic thinking, but it is a chance to prove themselves and to tackle some of Greece's longstanding problems.