Maximum austerity and minimum reform have been the outcome of the Greek crisis so far. The fiscal and external adjustments have been painful. But the changes to a polity and economy riddled with clientelism and corruption have been modest.

This is the worst of both worlds. The Greek people have suffered, but in vain. They are poorer than they thought they were. But a more productive Greece has failed to emerge. Now, after the election of the Syriza government, a forced Greek exit from the euro zone seems more likely than a productive new deal. But it is not too late. Everybody needs to take a deep breath.

The beginning of the new government has been predictably bumpy. Many of its domestic announcements indicate backsliding on reforms, notably over labour market reform and public-sector employment.

Alexis Tsipras, the prime minister, and Yanis Varoufakis, the finance minister, have ruffled feathers in the way they have made their case for a new approach. Telling their partners that they would no longer deal with the "troika" – the group representing the European Commission, the European Central Bank and International Monetary Fund – caused offence.

It is also puzzling that the finance minister thought it wise to announce ideas for debt restructuring in London, the capital of a nation of bystanders.

Running out of money

More significant, however, is whether Greece will run out of money soon. Most observers believe that Greece could find the €4.3 billion it needs to pay the IMF next month even if the current programme were to lapse at the end of February.

A more plausible danger is that Greek banks, vulnerable to runs by nervous depositors, would be deprived of access to funds from the European Central Bank. If that were to happen, the country would have to choose between constraining depositors’ access to their money and creating a new currency.

As Karl Whelan, Irish economist, notes, the ECB is not obliged to cut off the Greek banks. It has vast discretion over whether and how to offer support. The fundamental issue, he adds, is not whether Greek government securities are judged in default, since Greek banks do not rely heavily upon them.

Far more important are bonds the banks themselves issue, which are guaranteed by the Greek government. The ECB has stated it will no longer accept such bonds after the end of February, the date of expiry of the IMF programme.

If the ECB were to stick to this, it would put pressure on the Greek government to sign a new deal. But this government might well refuse. In that case the ECB might cut off the Greek banks.

This game of chicken could drive the euro zone into an unnecessary crisis and Greece into meltdown before serious consideration of the alternatives. The government deserves the time to present its ideas for what it calls a new “contract” with its partners. Its partners surely despise and fear what Mr Tsipras stands for. But the EU is supposed to be a union of democracies, not an empire. The euro zone should negotiate in good faith.

Growth-linked bond

Moreover, the ideas presented on the debt are worth considering. Mr Varoufakis recognises that partner countries will not write down the face value of the debt owed to them, however absurd the pretence may be. So he proposes swaps, instead.

A growth-linked bond (more precisely, one linked to nominal gross domestic product) would replace loans from the euro zone, while a perpetual loan would replace the ECB’s holdings of Greek bonds. One assumes the ECB would not accept the latter. But it might accept still longer-term bonds instead.

GDP-linked bonds are an excellent idea, because they offer risk-sharing. A currency union that lacks a fiscal transfer mechanism needs a risk-sharing financial system. GDP-linked bonds would be a good step in that direction.

Many governments would oppose anything that looks like a sellout to extremists. The Spanish government is strongly opposed to legitimising the campaign of its new opposition party, Podemos, against austerity.

Nevertheless, Greece and Spain are very different. Spain is not on a programme and owes much of its debt to its own people. It can justify much of its policy mix in its own terms, without having to oppose a new agreement for Greece.

Crucial issues

Two crucial issues remain. The first is the size of the primary fiscal surplus, now supposed to be 4.5 per cent of GDP. The government proposes 1.0 to 1.5 per cent, instead. Given the depressed state of the Greek economy, this makes sense. But it also means Greece would pay trivial amounts of interest in the near term.

The second issue is structural reform. The IMF notes that the past government failed to deliver on 13 of the 14 reforms to which it was supposedly committed. Yet the need for radical reform of the state and private sector no doubt exists.

One indication of the abiding economic inefficiency is the failure of exports to grow in real terms, despite the depression.

Indeed, Greece faces far more than a challenge to reform. It has to achieve law-governed modernity. It is on these issues that negotiations must focus.

So this must be the deal: deep and radical reform in return for an escape from debt-bondage.

This new deal does not need to be reached this month. The Greeks are right to ask for time. But, in the end, they need to convince their partners they are serious about reforms.

What if it becomes obvious that they cannot or will not do so? The currency union is a partnership of states, not a federal union. Such a partnership can only work if it is a community of values. If Greece wants to be something quite different, that is its right. But it should leave. Yes, the damage would be considerable and the result undesirable. But an open sore would be worse.

So calm down and talk. Let us all then see whether the talk can become action. – Copyright The Financial Times Limited 2015