Europe is altering the deal, and Greece better pray it doesn't alter it any further.
That, at least, was the message Europe sent with it latest bailout proposal that was really just a restatement of its original one. If Greece wants to stay in the euro, it will have to accept austerity on Europe's terms and not its own. There will be no negotiation, not anymore.
The sticking point is Greece's pensions. Europe wants Greece to cut them even more than they already have—which, in some cases, has been 40 percent—while Greece only wants to cut them half as much and make up the rest with higher taxes on businesses. The two sides seemed close enough that a compromise was coming, but apparently not. Europe sent a red-ink filled letter that your high school English teacher would be proud of—even, at one point, correcting the capitalization of a word—that rejected almost all of Greece's counter-proposals. Europe wants Greece to raise its retirement age to 67 by 2022, not 2025; to phase out a bonus for poor retirees in 2017, not 2018; and to cut back on early retirement starting now, not next January. In other words, to do what it was told the first time. Not only that, but Europe insists that Greece not tax its businesses more, since—this is funny in a sad kind of way—that would hurt the economy too much, and tax its consumers more instead. About the only concession is that electricity prices would be exempt from these new consumer taxes. If it seems strange that Europe would make demands, say yours are a "good basis for progress," but then refuse to really negotiate, it is.
So now the question is whether Greece will accede to these terms. If it doesn't, Europe won't unlock the bailout money Greece needs to make its €1.5 billion debt payment at the end of the month, and it will default. That's even worse than it sounds, though, since Greece's banks are sitting on a pile of Greek bonds and deferred tax assets that would presumably be worth a lot less in the case of nonpayment. The problem is the banks need those bonds as collateral for the European Central Bank-approved emergency loans keeping them afloat, so they'd probably be cut off without them—and the banks would collapse. Greece would have to stop people from moving their money out of the country, and decide whether it wanted to take money from depositors to bail in the banks or leave the euro so it could print money to bail out the banks. Europe knows this, of course, so it's been leaking stories about how shaky Greece's financial system is—not so much shouting run in a crowded bank as starting one—to put more pressure on the government to agree to a deal and agree to it now.
But it's one thing to accept a compromise you don't like. It's another to accept an ultimatum. It would have been hard enough for Greece's ruling party, Syriza, to pass its own tax hikes and pension cuts after it won power running against austerity. In fact, there were even rumors that finance minister Yanis Varoufakis would lead a left-wing revolt against the rest of the government over it. But it might be impossible for Syriza to pass the pension cuts Europe wants without some political help. It would need votes, in other words, from other parties, at which point it might as well have lost the last election. After all, what's the difference between an "anti-austerity" party that does all the austerity Europe tells it to and any other party that does the same?
Europe is making life so difficult for Greece with such specific demands for austerity that it almost seems like Europe is trying to get Greece to leave the euro now. Before this latest showdown, Greece had actually cut so much that it had a budget surplus before interest payments. That was enough that it wouldn't have needed any more bailouts—if Europe would forgive its debt, like many economists think Europe should. That is what former IMF official Ashoka Moody thinks the Fund's own research says it should do. The problem is that raising taxes and cutting spending during a recession hurts the economy more than it saves money. By Paul Krugman's calculation, budget cuts of 3 percent of gross domestic product, as Greece has proposed, would actually make its GDP shrink something like 7.5 percent, because of the spillover effects. So even though you have less debt, your debt burden isn't any better—and might be worse—since you have less money to pay it back. It can be self-defeating. That's why the IMF usually recommends that overindebted countries write down their debt enough that they don't have to do as much austerity.
But Europe isn't interested in that. It's interested in making Greece run bigger and bigger budget surpluses, without much regard for the economic consequences. Not only that, but Greece has to run surpluses the way Europe wants them to. Never mind that Greece has already cut its spending a lot, already cut its pensions a lot, and already reformed its labor markets a lot. There are always new cuts and new reforms that Europe says will make Greece grow at some point in the future.
If this is how it's going to be, why should Greece stay in the euro? It sure seems like Europe is trying to force Syriza to do what Syriza said it wouldn't just to prove a point: don't underestimate the power of the ECB. It's a not-so-subtle message to the anti-austerity parties in Spain and Portugal that they have nothing to gain and everything to lose from challenging the budget-cutting status quo.
Europe has struck back, and for the first time in a long time, it looks like Greece really could leave the euro.