Tsipras has realised Grexit was a shot term catastrophe

Dubai, UAE, 14 July 2015 – Eurozone leaders have agreed to offer Greece a third bailout. Greece now has until Wednesday to pass reforms demanded by the eurozone. Michael Jacobides, Associate Professor of Strategy and Entrepreneurship, London Business School, says Tsipras has realised Grexit was a short-term catastrophe. With no preparation on how to function with an alternative currency, no financial connections to the outside world, and no administrative capacity to manage the huge problems a transition would induce, the alternative is too scary to contemplate.

Michael Jacobides, Associate Professor of Strategy and Entrepreneurship, London Business School, says:

“After agonising twists and turns, a deal was struck, in overtime, which will allow Greece to remain within the eurozone.

“The terms and conditions of this deal, compared to where we were in November, suggest that this must be the most expensive “on-the-job” training in human history. The Greek government, after five months of posturing, lecturing, boasting, and losing sight of the Greek economy and public administration (let alone the interests and desires of its creditors) came around to the realisation that the alternative was too scary to contemplate. For all of its intellectual simplicity, Grexit under today’s economic conditions would have led to economic collapse, and possibly civic meltdown.

“With no preparation on how to function with an alternative currency, with no financial connections to the outside world, with no administrative capacity to manage the huge problems a transition would induce, Mr. Tsipras realised Grexit was a short-term catastrophe, even if its highly debatable medium-term benefits might exist. With the GDP in free-fall, mass tourist cancelations in the peak of the season, there was little choice. Ironically, Mr Varoufakis’s irresponsible negotiation tactic had allowed the markets to slowly digest the Grexit risk, so Greece had no real negotiating power. Having alienated its friends and infuriated the fiscally conservative European north, disaster was nigh - and a risk still exists.

“Today’s deal is undoubtedly tough on Greece, and is much more far-reaching than what was on the table before the negotiations broke down. Then again, the economy has taken a nose-dive and the financial sector collapsed, requiring significantly more funds. The creditor side had to sound tough to appease local pressures; the debacle with Finland showed that there was limited patience from other polities vis-à-vis Greece. But on the upside, there seems to be a much greater push for structural transformation in this deal than in the last deal brokered by the EU.

“The emphasis on promoting competition, improving the public service, and changing the governance structure can bring significant fruits. This, in conjunction with the 35B investment programme, can help counter-weight the downsides from aggressive cuts in spending and tax hikes. So we can only hope that this will be accepted but European parliaments, and, more important, that breaking with their long-standing practice, Greek authorities will take ownership of this massive change management programme. The proof will be in the (implementation) pudding.”