With an agreement over a multi-year $146 billion bailout for Greece, the European Union has, for now, staved off disaster. Problems remain, the worst being that under EU rules, each contributor country now has the right to accept or reject its share of the burden. Germany, where the public hates the bailout, is the biggest worry, but Angela Merkel's government seems ready, willing and able to force legislation authorizing Germany's $29.6 billion share through Parliament through now that Chancellor Merkel has made the bailout more painful for the Greeks. (This sounds like horrible Teutonic moralism and vindictiveness at its worst, but the Chancellor has a point. If bailouts are pain-free, then everyone will want one and German taxpayers could end up assisting several more sickly eurozone members before the crisis ends.)
The austerity measures make sense. The age of retirement will be linked to life expectancy, pensions will be calculated on the basis of average earnings rather than the last year's pay, the “13th and 14th” monthly paychecks (Christmas and Easter bonuses) for government workers earning more than 3,000 euros (roughly $4,100) per month will end. Labor markets will be liberalized, with companies able to fire more workers with less trouble and with lower wage scales for young workers and the long term unemployed. Some of this we could learn from: basing the age of retirement (and Medicare eligibility) on life expectancy would gradually increase the retirement age and save hundreds of billions of dollars over the long run.
There are just three niggling questions left. First, will the Greeks be willing or able to follow through with the plan? It's not just the problem of protests and strikes in the short term. The real question is whether what amounts to a savage combination of cuts in government spending and tax increases on the other (the Greek national sales tax will rise from 21 to 23 percent, 'sin' taxes on liquor and cigarettes will rise, and the notoriously lax and corrupt collection system will in theory be made more efficient) will just cripple the economy. As Steve Erlanger writes in a very useful analysis piece at The New York Times, there are worries that the economic package will push Greece into a deflationary spiral, making debts harder to repay and adding to popular discontent.
The second unanswered question: will the markets now leave the rest of the eurozone's weak sisters alone? Will investors now trust Europe to stand behind the debt of countries like Portugal, Spain and Italy — or will they think that European financial authorities lack the discipline, resolution and coordination that could stop new crises from brewing?
And finally, there's this: now that we see the dangers of the European currency project, do the Europeans have what it takes over the medium term to put their economic house in order and develop the institutional and policy frameworks that can make the euro work over the long term?