The recently approved extension of the EU/ECB/IMF bailout program kicks the Greece debt problem four months down the road. Where to from there? Unless there is a major change in approach by both Greece and the EU, it will not be long before we are again fretting over Greece exiting the euro and the future of the euro itself.
Stephen Grenville says ‘Greek politicians have to learn to break election promises’, specifically promises that the austerity bail-out program would be rejected. Wolfgang Munchau says ‘Athens must stand firm against the Eurozone’s failed policies’, particularly the requirement to run a primary budget surplus of 3% while the country faces massive unemployment.
Both are right.
Rejecting the bail-out program would see a collapse in the Greek economy. So Greek politicians have, as Stephen recommended, broken their promises, achieving an extension to the program and agreeing to implement a series of reforms by June. While there remain doubts the Greek Government will deliver, the next hurdle is to negotiate a program to replace the one that expires in June. Here Munchau is right: Greece should stand firm in seeking changes.
Greece needs a more flexible program than the one imposed by the EU/ECB/IMF that has resulted in a 30% decline in the size of the economy and mounting poverty. It also needs a program that recognises that Greece’s debt levels are not sustainable.
But for this to happen there needs to be a major change in approach by the EU. This may be the biggest stumbling block in resolving the Greek crisis.
Much of the focus has been on what Greece needs to do, with headlines such as ‘Greece now has a chance to change’. More attention should be placed on the need for the EU/ECB/IMF to change, and particularly to compromise on what they want from Greece. However, the politics in Europe are not compatible with the idea of compromise when it comes to Greece.
Greece has got a rough deal throughout the crisis. While it is responsible for the debt-loaded mess it is in, it was forced into a draconian and flawed bailout program in 2010. This was acknowledged in an IMF self-assessment. The Fund said the program was based on excessively optimistic assumptions, a gross underestimation of the impact of the austerity measures, and was inconsistent with the IMF’s rules that a country gaining exceptional access to resources should have a high probability that its public debt will become sustainable.
The IMF was pressured into approving the program by the EC because of the fear of contagion. If Greece’s debts were seen to be unsustainable, so might those of Portugal, Spain and Italy.
But there was also strong resentment towards Greece, particularly in Germany. The view was that Greece manipulated its statistics to get into the euro and the Greeks didn’t pay their taxes, retired too early and worked too little. There was no sympathy towards Greece. Imposing tough conditions was necessary to obtain domestic support in Germany for a bail-out. That view remains today, evidenced by German business groups urging MPs to take a tough line on any extension.
Throughout the recent wrangling over the program, the EU was determined there be no weakening in the conditions and that Greece repay all its debts. As was the case with the initial bail-out program, this view was influenced by what was happening elsewhere in Europe rather than what is best for Greece.
The hard line taken by some EU ministers reflected the rise of anti-austerity parties in their own countries. The Spanish finance minister was particularly tough with Greece. This is not surprising because Spain’s anti-austerity party, Podemus, leads the opinion polls in the run-up to the election. If Syriza was seen to be successful, this would increase support for Podemus. Anti-euro parties are on the rise in France and Italy too.
Another factor behind the EU’s intransigence is the view that the risk of contagion is now much lower. Europe now has a firewall in the form of the European Stability Mechanism to support countries facing financial pressure. However, UK Chancellor George Osborne has warned that a Greek exit could be very damaging for Europe and the world. A messy Greek exit would indeed be a major shock to a fragile Europe.
The political fallout may be the most destabilising factor. Greece would default on its debts held by the ECB and EU (the IMF would likely be exempt). This would crystalise in the minds of European (particularly German) taxpayers how much has been lost in attempting to bail out Greece. This may well impact on the willingness to provide financial assistance to other countries and the commitment to the euro itself.
So the stakes are high for all parties to negotiate a successful bail-out program for Greece. The concern is that frustration and resentment towards Greece may continue to prevent Europe from making the necessary compromises.
Photo by Flickr user Glorgos.