Our Opinion: 2018
Great news on Greece
I am looking forward to arriving in Greece today, with a feel of economic optimism that has been missing for years. There is great news on Greece, according to the Eurogroup of finance ministers.
“All the big issues” of a reform package under discussion with the Greek government have been settled. The tax and pension reforms, which Athens must now pass into law, are designed to improve Greece’s primary budget surplus (the overshoot without taking debt service costs into account) of 2% of GDP. The deal unlocks the latest payment from the latest bailout programme (the third since 2010, just in case you’ve lost count), which will avoid a default on payment worth more than €7bn in July.
If you think this rings a vague bell, you’re right. There have been plenty of news flashes like this since the start of the Greek debt crisis, and none of them heralded a definitive end to the affair. This latest chapter in the saga won’t end the “cycle of match, mend and pretend” either, as reported by Bloomberg.
It should buy Greece time until 2018, but it’s a fudge that won’t resolve the matter.
After nearly a decade of punishing austerity, which has seen the economy shrink by a quarter and unemployment stagnate at 25%, the country remains stuck in a vicious circle. GDP growth has been hovering around the 0% line for the past two years and fell into the red again in the fourth quarter. Since the bailout began, austerity and structural reforms have failed to stem the decline enough to prevent the overall debt burden from rising ever higher. Greece owes an utterly unsustainable 180% of GDP. Without significant debt relief, the country won’t ever be able to grow fast enough to work off its debt.
The International Monetary Fund has come to this conclusion, but the other main creditor, the EU, still seems to think that with enough effort it should ultimately be able to pay its creditors. But as a paper for the Peterson Institute makes clear, this is a pretty heroic assumption. The EU is working on the basis that Greece’s primary surplus will rise to 3.5% in 2018 and stay there for ten years. No country has ever managed this, and it’s hard to see why Greece, of all states, should suddenly miraculously set a precedent – especially when the government’s “legitimacy is fragile and [the] economy still in tatters”, according to Matthew Klein in the Financial Times.
The Prime Minister, Alexis Tsipras, is also under growing pressure at home. His Syriza party’s unlikely coalition with Independent Greeks (Anel), a small populist party led by Panos Kammenos, is in danger of falling apart. Mr Kammenos, the Defence Minister, opposes Mr Tsipras’s efforts to resolve a 25-year dispute over what Greece’s poor northern neighbour, officially known as the Former Yugoslav Republic of Macedonia, should henceforth be called. Mr Kammenos has also broken ranks with Syriza over how to handle Greece’s latest flare-up with its historical rival, Turkey, a NATO ally with a policy of contesting Greek sovereignty over a clutch of small Aegean islands.
Mr Tsipras may have hoped that some attention could be diverted from these problems. Syriza has launched a parliamentary probe of ten senior politicians, including two ex-prime ministers, Antonis Samaras and Panagiotis Pikrammenos, the current central bank governor and Greece’s EU commissioner. The politicians are accused of accepting a total of €50m in bribes from Novartis, a Swiss drugs firm, between 2010 and 2015.
But the scandal has failed to gain traction, after outraged denials by the accused and talk of government influence over the judicial process. The allegations of bribe-taking, according to opposition members of an all-party committee, may even have been faked. They are based on testimony to the anti-corruption prosecutor by three anonymous whistleblowers placed in a witness-protection scheme. “The transcripts [of the whistleblowers’ testimony] are not exact. The three apparently didn’t witness any bribe-taking themselves,” said a committee member.
Mr Tsipras’s talk of economic success is also starting to look threadbare. The economy grew last year by only 1.4%, compared with a budget forecast of 2.5%. This year’s growth target has already been cut to around 2%.
The prime minister’s hopes of a clean exit from the bail-out in August look unrealistic, too. Greece is already committed to lowering the income-tax threshold and making another round of pension cuts in 2019. A deal with the EU on debt-relief measures, due to be wrapped up in June, will include a slew of conditions to keep reforms on track and prevent backsliding.
Some pundits predict that Mr Tsipras will cut his losses and call an election in October, almost a year before his government’s term expires. The centre-right New Democracy has a lead of 10% in opinion polls. Whether ND can win an overall majority depends on how many voters smaller parties can woo away from Syriza. Meanwhile, Mr Tsipras’s advisers insist their boss is “not a quitter” and that there is still plenty of time to win back disaffected left-wing voters.
Debt relief could involve a straightforward reduction in the amount of debt Greece owes, but a more politically palatable option for European electorates may be an extension in loan maturities or reduction in interest rates miles into the future. Until we start hearing discussions along these lines, however, we can expect the Greek debt saga to grind on and on.