A Greek deal that is bound to fail

History works in strange ways. Some hundred years ago, after the First World War, the Allies imposed on Germany a Carthaginian peace in an effort to recoup their German loans. That peace destroyed the German economy and sowed the seeds for the political disaster that followed the collapse of the Weimar Republic.

{mosads}Today, the shoe is on the other foot. Germany is leading Europe in imposing on Greece punitive and humiliating terms in a supposed effort to restore Greek economic growth and save the euro. Sadly, much as the Allies’ program for Germany had failure written all over it from the very start, so too does Germany’s Greek program. This has to raise the real risk of Greece being well on the road to becoming a failed state.

To understand why this weekend’s Greek economic agreement is bound to fail, it is well to recall that the Greek economy is already in a 1930s-style economic depression, which is now being exacerbated by the more than two-week closure of Greece’s banks. It is also well to recall that a major contributing factor to Greece’s economic collapse over the past five years was the imposition on Greece by the International Monetary Fun (IMF) and Europe of excessive budget belt-tightening within a euro straitjacket. That straitjacket precluded the use of either monetary or exchange rate policy to offset the negative effect on demand of tax increases and public spending cuts.

The basic flaw of last weekend’s Greek agreement is that it is mandating policies for Greece that are very little different in substance from those policies that have failed so spectacularly in the past. Specifically, it is now requiring major tax increases and pension cuts from that country while it is still in a euro straitjacket. To compound matters, it is demanding that, should the economy again falter and should the budget not perform as expected, further budget tightening is to be adopted.

At an economic level, this has to beg a basic question: Why, if past major Greek budget belt-tightening in a euro straitjacket helped get Greece into its economic depression, will the same such policies now promote economic growth? This question would seem to be all the more relevant now that the Germans are officially floating the idea that it might be a good time for Greece to take a five-year holiday from the euro, which is hardly likely to instill confidence in Greek’s battered population.

At a political level, the agreement also raises basic questions. How will an agreement that now requires even more budget belt-tightening from Greece than that proposed only two weeks ago not tear Greece’s politic and social fabric asunder, especially when such austerity was overwhelmingly rejected by the Greek electorate in a very recent referendum? And how can Alexis Tsipras possibly survive as prime minister when he successfully campaigned so hard for a “no” vote only to completely reverse himself a week later?

It is difficult to believe that German Chancellor Angela Merkel and Wolfgang Schauble, her finance minister, do not understand that a new round of major budget austerity within a euro straitjacket will further sink the Greek economy and upend its politics. Which all has to make one think that their motivation is not so much to help Greece emerge from its economic depression as to send a clear message to the governments in countries like Italy, Portugal and Spain that it does not pay to defy German economic orthodoxy.

Irrespective of the motivation of Greece’s European partners, the net result of this agreement will be to deepen Greece’s economic and political woes in the very near term. That is bound to pave the way for a major political backlash and a disorderly Greek exit from the euro before year-end. It is also bound to poison Greece’s relations with Europe for many years to come and to create an opening for China and Russian in a strategically important part of the Balkans.

Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.