Hope and fear in the endless Greek crisis

There is a slim chance that economic recovery will take hold in 2016
©Daniel Pudles
The Greek economic crisis has blighted the country and the eurozone for six years. The election last January, which brought Alexis Tsipras and his leftwing Syriza party to power, added further friction between Greece and the rest of the eurozone. Mr Tsipras vowed to undo austerity — a promise he could not deliver on his own.
In the event, after winning a referendum in July against the terms offered by the eurozone, he agreed to a new €86bn three-year eurozone programme on terms not so different from those he had persuaded the Greek people to reject. After a split in his party, Mr Tsipras then won another election in September. Yet the capital controls imposed in June remain in force and the economy has fallen back into recession.

Is there a good chance that economic recovery will take hold in 2016? This was in my mind as I visited Athens last week. My conclusion was that a chance does exist. But it is not, alas, that good.

The starting point has to be with the differences of view among the main players: the Greek government and wider political community; the International Monetary Fund; and eurozone creditors, particularly Germany.

As Mr Tsipras made clear last week, one of his aims is to avoid another programme with the IMF. He finds its demands hard to bear. More broadly, he thinks that “the sooner we get away from the [bailout] programme the better for our country”. He notes: “If Greece completes the first [progress] review in January, we’ll be covering more than 70 per cent of fiscal and financial measures in the agreement.” He hopes Greece will soon regain its sovereignty or, with the IMF out of the picture, at least will only have other Europeans to deal with.

The Athens government is also optimistic about the economic future. Mr Tsipras expects remaining capital controls to be lifted by March 2016 and for Greece to regain access to international capital markets by the end of the year. Banks have been recapitalised more cheaply than feared and confidence in the banking sector is returning. The government also hopes economic growth will soon resume. (See charts.)

Martin Wolf chart
Nevertheless, the government is hoping for further debt relief. The IMF agrees with it. This is also plausible. Interest due on public debt is forecast by the Bank of Greece to jump from 2 per cent of gross domestic product up to 2021 to over 8 per cent in 2022 and then stay over 4 per cent until the 2040s. Sustainability largely depends on the terms of the new debt. If the eurozone made it possible for Greece to borrow on triple-A terms forever, the debt would be sustainable. Otherwise, it probably would not be.
The IMF argues that Greek debt has become unsustainable only because the government failed to meet its commitments. That is doubtful. The ability of Greece to deliver was never credible.

Moreover, while the IMF does support Greece on debt relief, it is very sceptical of its ability to deliver structural reforms in the absence of a political consensus that the reforms are desirable.

It insists, against the government, that the country is well behind where it was a year ago on reforms. It has backtracked in important areas.

A sizeable primary fiscal deficit (before interest payments) is also likely next year. A particular bugbear for the IMF is unsustainably generous spending on pensions. The government says cutting pensions further is impossible. The IMF responds that the fiscal transfers to the pension fund of 9 per cent of GDP and the huge cuts to discretionary spending are unsustainable.

Martin Wolf chart

Eurozone creditors disagree with the IMF on the need for more debt relief. But Germany at least very much wants the IMF to remain a lender. So great is German mistrust of this (or indeed any) Greek government and the European Commission that it wants IMF-style conditionality imposed on Greece more or less indefinitely. But both the Greek government and the staff of the IMF dislike this possibility. The former hates it because it wants a free hand.

The latter hate it because they fear the conditions for successful programmes do not exist. This being so, they cannot, in good conscience, recommend one to the board.

Far too many obstacles to smooth progress now exist: review of the eurozone programme due early next year; expiry of the IMF programme in March; the fragility of the economy and, more broadly, lack of confidence and trust inside Greece and between it and the creditors. With exit currently ruled out by both sides and a strong political consensus in Greece that a way must be found to stay inside the eurozone, these frictions should be manageable. But this is definitely not a case of living happily ever after. This is a bad marriage in which the two main partners agree only that divorce would be worse (albeit only just) and the counsellor seeks a way to abandon the quarrelsome couple.

Martin Wolf chart

So how might this mess end? One possibility is that enough of the reform package is enacted and enough of a post-crisis economic bounceback arrives to convince the Greek government to stick with reforms, thereby generating a virtuous circle of reform and growth. Another is that the programme fails once again, because the economy itself fails. The government (which has a tiny majority) then falls, to be replaced by a pro-reform and more successful government. Yet another possibility is that a successful government does not arrive and Greece ultimately leaves the euro.

This is for the longer term. Soon, however, decisions have to be made, including by the IMF. In the background to these lie political disarray in Spain, discontent in Italy and the migrant crisis, on which Greece is on the front line.
I looked up to the Parthenon. It is old, damaged and under repair. Yet I hope it will stand for further millennia. Europe, too, is old, damaged and under repair. I hope Greece will prosper inside a stable eurozone. Yes, it is still mostly hope.

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