Who would have thought a couple of years ago that the European Union would be arguing in 2018 not about how to push Greece out of the eurozone but about the best way for the country to emerge from a completed bailout program?
At stake is whether Athens, which has successfully tested the capital markets, makes a clean exit from its third international rescue when it expires on August 20 or whether it needs some sort of financial safety net. The issue will be taken up at the Eurogroup meeting of eurozone finance ministers in Brussels on Monday.
The answer is a political no-brainer.
Even though it might make sense to have a precautionary credit line from the European Stability Mechanism, the eurozone’s bailout fund, in case markets turn sour or political turbulence pushes up borrowing costs, there is no chance of the Greek government requesting such a standby loan because of the conditions that would inevitably be attached.
While some skeptical lenders don’t trust the Greeks to go straight and would rather keep them under strict outside supervision, that would be politically counterproductive and unsustainable.
Prime Minister Alexis Tsipras is adamant — to borrow a phrase — that Grexit means Grexit.
Having inflicted so much pain and sacrifice to implement an adjustment program that his leftist Syriza party never believed in, Tsipras’ best chance of survival is to show that Greece can stand on its own feet again. He needs to demonstrate that he has gotten rid of the hated “troika” of foreign lenders — the European Commission, the European Central Bank, and the International Monetary Fund — and cast off the diktat of their “memorandum.”
The system of bailout supervision by visiting troika teams encamped at the Athens Hilton Hotel with powers to inspect ministries’ books, summon Greek officials, and force the government to rescind spending decisions was widely resented as a national humiliation, even if some Greeks recognize it was justified by the €300 billion that foreign taxpayers have lent.
Although the country has finally returned to modest economic growth, beaten its budget surplus targets and enacted the cuts in pensions, wages and public spending demanded by its lenders, society is gutted after a decade of depression and austerity. The current account balance is back in balance, investment is returning, unemployment is falling but it remains over 20 percent, and far higher among the young.
There is still no “feel good factor” for ordinary Greeks.
The fiscal turnaround was achieved mostly through pay cuts, tax increases and improved revenue collection rather than liberalizing reforms and privatizations to attract investors and unleash entrepreneurs.
The ECB and the IMF, in particular, are understandably reluctant to let Greece make more mistakes. Veterans of years of adversarial negotiations worry that Athens will immediately start to undo labor market and welfare reforms imposed by the lenders.
There are also concerns that a general election due in 2019, which might be brought forward to later this year, followed by a presidential election in 2020, will lead to reckless spending and perhaps to a hung parliament in which no party has an outright majority, scaring markets.
The Commission and France, on the other hand, want to declare victory and give Athens the benefit of the doubt on its future behavior. They point out that Greece will anyway remain subject to less intrusive “post-program monitoring” until it has repaid 75 percent of the official loans from eurozone lenders.
European Economic Affairs Commissioner Pierre Moscovici made the case for a clean exit on a visit to Greece this month, declaring: “There cannot be a fourth program” — not even a precautionary one.
Brussels and Paris want to stretch out loan repayments to reduce annual debt service costs and link them to the growth of the Greek economy. Debt relief remains politically sensitive in Germany, the Netherlands and Finland, and the head of the ESM, Klaus Regling, has said it will come with enhanced surveillance to ensure there is “no backtracking” on promised reforms.
Neither are Germany and the like-minded countries keen on any discussion of “more money for Greece,” even if it’s only in the form of standby credit.
Greece’s own central bank governor, Yannis Stournaras, made the case last week for seeking precautionary financial support, arguing that it would assure smooth access to market financing, lower banks’ lending costs, potentially enable the ECB to include Greek bonds in the final phase of its asset purchase program, and help smooth the lifting of remaining capital controls imposed during the 2015 crisis.
Yet the forces in favor of keeping the handcuffs on Athens are weakened by the interregnum in Germany. Wolfgang Schäuble, the enforcer-in-chief of austerity who tried unsuccessfully to bounce Greece out of the eurozone in 2015, is no longer finance minister. His likely successor, Social Democrat Olaf Scholz, has argued that Berlin should stop telling other European countries how to run their economies.
A similar debate preceded Portugal’s exit from its three-year EU-IMF bailout in 2014. Lisbon rejected the option of a precautionary credit line and successfully returned to market financing and economic growth. A Socialist government elected with Communist and far-left support has reversed some public sector pay cuts and eased up on austerity without harming either its recovery or its credit rating.
Greece is weaker than Portugal. But it, too, needs a chance to chart its own course — subject to the discipline of financial markets rather than of the troika or the German finance minister.
