Grexit postponed: How the euro was saved by sinking Greece. Again

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Europe has been in a state of economic crisis for so long that it has started to feel inevitable. It is not. The European Union went into a recession along with the rest of the world in 2008; unlike Canada and the United States, much of the continent has never come out. Two of the EU's largest countries, Italy and Spain, have recovered so little that their economies are smaller than they were seven years ago. The same goes for Portugal.

The unemployment rate for the euro zone, the 19 countries using the common euro currency, is 11.1 per cent – higher, after all these years of supposed recovery, than the Canadian unemployment rate at the bottom of the recession. Italy's unemployment rate was just 6.1 per cent in 2007; it has since more than doubled. Spain's count, 22.5 per cent, is nearly triple the prerecession figure.

And leading the parade of the downtrodden, there's Greece. Nearly 26 per cent of working-age adults are unemployed. More than half its young people are jobless. Gross domestic product has declined by a quarter since 2007. Even if Greece could return to a modest rate of growth, it wouldn't regain its 2007 level of output and wealth until some time in the 2020s. No Canadian recession, not the stagflation of the early 1970s or the downturn of the early 1990s, even comes close.

None of this had to be. It is not some divine punishment for economic sins. The catastrophe is the product of a series of policy choices made by human beings. Different choices would have led to a different outcomes, and still could, but instead of figuring out how to get out of recession, Europe's political class keeps turning to policies that have pushed large parts of the continent deeper into it.

Late last year, Greek voters elected a government that promised to go to war against the European establishment, and make it change course. Can you blame them? The status quo is clearly not working for Greece, or for a lot of other Europeans. It's why, across the continent, we are seeing the rise of angry parties on the extreme right and left. The solutions they propose are often entirely off-base. But the problem they are responding to is real.

In Greece, that reality is extreme. The more the country's government cuts spending and services, the more an economy in recession contracts further. Greece's European partners have repeatedly demanded that Greece return to economic health by dramatically chopping public spending, and Athens has largely complied. It has not worked.

The more Athens cuts, the more its economy is shrunk by the cuts, and the more Greece's unsustainable debt burden, now at 177 per cent of GDP, grows relative to a shrinking economy. This is not some fanciful theory. It's just arithmetic. Absent other ways of stimulating the economy – say, a lower currency, or an export and tourist boom sparked by recovery in the rest of the euro zone – Europe's cure for Greece always promised pain without gain.

As we went to press, Greece and the EU leadership appeared to be very close to an agreement to keep the country from defaulting on its debts, to prevent its banking system from collapsing, and to keep it from exiting the euro zone.

To get such an agreement, however, Greece's leaders have had to capitulate. After months of negotiations, and even after convincing the Greek people to vote No in a snap referendum on Europe's harsh demands for more austerity, Greek Prime Minister Alexis Tsipras is now bending his knee and saying, Yes. In return, his government is asking for what appears to be only modest debt relief.

It is a stunning climbdown. Mr. Tsipras's Syriza party came to power aiming to convince Europe that a change of economic course was needed not just for Greece, but for all Europeans. Europe's governing elite shrugged. If euro zone finance ministers accept the Greek offer – not yet a certainty, but likely – the result will not be the revolution Mr. Tsipras once hoped for. For the third time in five years, Greece will be signing up for the maintenance of the status quo.

Or rather, status quo-minus. Over the past few weeks, the Greek banking system has largely shut down, and business activity has ground to a halt. Greece's shrunken economy, which had contracted by 25 per cent as of this spring, has since contracted some more. On its long journey to economic recovery, Greece's starting line has been moved back, again.

Absent significant debt forgiveness, Greece is going to be back at the table in a year or two. Without a major debt writeoff that makes its debt sustainable, and gives a small country a chance to return to growth, this latest deal, the third Greek rescue attempt since the recession started, will itself need to be rescued.

But in purely political terms, the European project has been saved, at least for now. It has been spared the humiliation of its common currency losing one of its members, which would have spread uncertainty about its future, and threatened crises in other countries. That is not nothing.

However, Europe, led by Germany, has achieved this by once again kicking the can down the road. For the third time in five years, Europe has punted a problem into the future, and the people of the problem country with it. Sometimes there is wisdom in this; some wounds really are healed with time, and some problems, if set aside, resolve themselves. Is Europe's economic condition such a thing? No.

Across the continent, angry parties of the left and right are being empowered by Europe's economic policy failures, particularly in Southern Europe. The EU consensus may look alive and well in Brussels. But out on the periphery, a lot of hard rain has already fallen, and anger is growing.