Greece re-emerging from debt quagmire, but with challenges ahead

By George N. Tzogopoulos Source:Global Times Published: 2018/8/27 17:48:40

The last eight years have been painful for Greece. To avoid a chaotic default and a Grexit, the country had no alternative but receive rescue packages from the EU and the IMF. In May 2010, February 2012 and August 2015, different Greek governments successfully asked for financial assistance. This financial assistance was given in exchange for austerity measures and structural reforms. The main objective of Greece's creditors was to cover its debt obligations as well as to create a new growth model for it to become - at some time - economically independent.

A few days ago, the Greek government announced the exit from the final, three-year bailout. European leaders are greeting this development. Progress achieved since 2010 has been indeed impressive. Greece has created a budget surplus and has managed to decrease its current account deficit. Some important privatizations - including the one of the Piraeus Port Authority by the Chinese company COSCO - have taken place. Important reforms making the Greek pension system sustainable, tackling tax-evasion and introducing transparency in signing public contracts have been carried out.

Moreover, the issue of the Greek debt has been settled. In 2012, the private debt of Greece was restructured as private bondholders were forced to accept losses exceeding 50 percent. As far as the public debt is concerned, a June 2018 eurozone decision announced some practical steps to improve its profile. If additional measures are required, they will be discussed at the eurozone level in 2032, when Greece's grace period will end.

Some skeptics argue the eurozone did not drastically proceed to safeguard the sustainability of the Greek public debt. Judging from an economic perspective, they are right. Eurozone ministers could not ignore the aspect of politics though. The Lisbon Treaty does not allow a normal debt haircut. Further to this, the national parliaments and public opinion in eurozone member states might not easily accept a settlement forgiving a significant part of Greece's public debt as it has accrued since 2010.

What matters more is that the eurozone does not abandon Greece but stands by its side. Against this backdrop, the country is leaving the bailout with a sizeable cash buffer of €24.1 billion ($28 billion) to facilitate its smooth return to the markets in the next two years. The exit from the bailout does not signal the end of the adventure. Although Greece is not expected to receive additional loans by the EU and the IMF, it has to continuously implement reforms and sustain bailout objectives in order to pay back all its creditors in the medium and long-term. Inter alia, the Greek government has already committed to maintaining a primary surplus of 3.5 percent of GDP until 2022 and possibly 2.2 percent of GDP from 2023 until 2060.

The main problem is that Greek governments - irrespective of their political spectrum - heavily rely on cuts and taxes to achieve the aforementioned surpluses.  They do not always support healthy public or private investments but prefer to spend funds to serve political goals. Under these circumstances, unemployment is on the rise. The public sector has largely frozen recruitments and when it recruits, non-transparent criteria are being frequently applied. For its part, the private sector is asphyxiating due to limited access to cheap credit and because of high taxation. As a result, young people are looking for jobs abroad, depriving Greece of hope and dynamism and further complicating the ageing problem.

For the years - if not decades - to come, Greece will be placed under "enhanced surveillance" by the European Commission to remain on track. The stabilization of public finances has not yet been accompanied by a sustainable growth rate to help real economy breathe. Perspectives are not bright either. Greek politicians are unable to build on consensus and jointly support a growth plan. They are ignoring future generations.

Eight years after the outbreak of the Greek sovereign debt crisis and despite the impressive economic progress made, a fundamental obstacle exists. This shows the inability of Greek politicians to inspire the society, build the right paradigm and leave a legacy of unity and vision.

The author is a lecturer at the European Institute in Nice, France.

Posted in: VIEWPOINT

blog comments powered by Disqus