Don't Panic! It's Just Democracy! Sobering Is Next
Adelina Marini, January 28, 2015
Is the end of the Greek pains near? Can the new Greek Prime Minister Alexis Tsipras fulfil his promises to put an end to the austerity and write off part of the debt? Will the EU fall apart? Is it so scary that a populist extreme left party like Syriza has won an election with almost full majority (the party fell short of two seats for an own government)? And does this mean that in other countries where similar parties emerged they will take over? Those are only part of the questions which have been filling the pages of the European press for weeks and have been holding awake prime ministers and ministers in the euro area. The answer to all these questions is one - whatever the outcome, what is important is to stick to the agreements.
What is the current situation?
In March 2012, Greece concluded its second bailout programme financed by low interest rate loans by the governments of the euro area member states and the International Monetary Fund. It is worth 164.5 billion euros. The euro area's share in this amount is 144.7 bn euros and IMF's is 19.8 bn. By the time the programme was signed, the international assistance already paid to Greece amounted to 73 bn euros. Of them 52.9 bn were direct payments from the euro area countries (without Slovakia) and 19.9 bn was the IMF's share. The term of the programme is from 2012 to 2014. In the end of 2014, the member states agreed an extension to the programme of 2 months (by the end of February). The money is disbursed to the Greek government in tranches on the basis of implementation of the detailed reforms. For every period there are benchmarks that need to be met and when the mission of the Troika (consisting of representatives of the Commission, ECB, IMF) verifies that they are met then the disbursement of the next tranche is approved.
When the second adjustment programme was agreed it was very clearly stated that its successes depends entirely on Greece - on the full and timely implementation of the fiscal consolidation and structural reforms aimed at boosting growth, like removing the regulated professions, pension reform, removing administrative burden, reform of the judiciary, etc. The forecast on which the programme was based showed that the Greek debt (after the haircut) could return to the level of sustainability (below 120% of the GDP) if the macroeconomic projections materialised and if the programme is fully implemented. It was expected back then that the debt-to-GDP ratio would fall below 117% in 2020 and would decline further to below 90% in 2030.
The macroeconomic conditions for the realisation of these predictions were the Greek economy to exit the recession and start growing again in 2014. It is also written in the programme that if reforms of the product and services market are implemented in the right way Greece could reach a GDP growth of 3%. According to the autumn economic forecast of the European Commission, the growth for 2014 was expected to be positive (0.6%) and this year the Commission expects much more tangible economic expansion of 2.9%. The next year's projections are for growth of 3.7%. Will these projections materialise we are to see in the winter forecast which the Commission will publish on 5 February. In October, the Commission predicted that Greece's public debt will reach 168.8% of GDP this year and will decline next year to 157.8%. This year the unemployment rate is expected to be 25% (which means a decline compared to 2014 when the share of the unemployed was 26.8%). In 2016 it is expected to drop to 22%.
According to the Commission analysis from October, the problems before the economic recovery are the uncertainty whether the needed reforms will be implemented. The Commission insists that Greece is capable to reduce its debt without writing it off thanks to the primary budget surplus which is expected to continue if there is no change of the implementation of the adjustment programme. The surplus is significant - 1.3% expected next year. For this year the Commission envisages a budget deficit of -0.1%. These data show that Greece is, indeed, exiting the crisis. Naturally, against the backdrop of so many unemployed it is hard to expect celebrations. But let us see what is the situation in other countries that were subjected to the "terror" of the Troika. Ireland exited its programme in the end of 2013. Currently, this is the country with the highest economic growth in the EU as a whole. In 2014, the economic growth is expected to be 4.6%. For this year the forecast of the Commission is the GDP to grow by 3.6% and next year by 3.7%.
Ireland, too, has very high debt-to-GDP ratio, although it is not in the category of Greece. In 2014 it was expected to be 110.5% and this year 109.4%. In 2016, the Commission envisages the debt burden to decline to 106%. The unemployment is steadily on the decline. In 2014, the expectations were for 11.1%, in 2015 for 9.6% and next year 8.5%. The Portuguese economy is not developing so successfully, but the expectations of the Commission in October were for economic growth of 1.3% this year and 1.7% in 2016. Portugal's debt is expected to be 125.1% in 2015 and 123.7% in 2016. The country is still making budget deficits, but they are generally within the limits. The forecast for 2015 is for -3.3% and next year -2.8%.The unemployment rate this year is expected to be 13.6%.
Italy is another country with very high public debt but it was not in a programme although, on several occasions, it posed risks for the euro area. This year the Italian debt level is expected to be 133.8% of GDP and next year 132.7%. Italy's Finance Minister Pier Carlo Padoan admitted in front of the economic committee of the European Parliament that Italy had just recently realised the seriousness of the problem with the high public debt and was already working on reducing it. The situation in Spain is similar, although Spain worked on a different programme, without the Troika. Spain, however, has the same severe situation with the unemployment. The problem is, however, that Greece's debt is very expensive. The price of the 10-year benchmark bonds is huge - 8.50%. To compare, the bonds of Italy are traded at 1.54%, of Spain at 1.38%, of Portugal at 2.44%. This is the greatest problem Greece needs to address. The decision, however, does not lie in any debt cancellation or, even less, in reversing the reforms with or without the control of the Troika.
Reforms must be completed or there is no effect
Last week, during the World Economic Forum in Davos, there was one of the very few panels dedicated on the crisis in the EU. In one of the two panels were gathered together the prime ministers of reformist nations - Ireland, Latvia, Finland, The Netherlands, Germany. All of them agreed that for successful reforms political will and speed are needed. According to Ireland's Prime Minister Enda Kenny, key for the success is political stability because it is essential for the drawing of a clear strategy. In Ireland, this happened relatively easy because the country elected in the beginning of the crisis a two-party coalition government. And one more very important thing Enda Kenny shared from own experience, "we chose a constructive stance with the Troika". This is an important clarification because, so far, the attitudes in Greece have always been hostile to the Troika and the adjustment programme perceived as something alien and imposed from the outside. Ireland did the opposite - it adopted the programme as its own and worked in permanent dialogue with the Troika.
Latvia's Prime Minister Laimdota Straujuma gave the usual Latvian recipe - fiscal consolidation, speed of decisions and ownership. She shared that in the peak of the Latvian crisis two thirds of the consolidation were achieved through structural reforms. The rest is to believe that these reforms are necessary. The Dutch prime minister pointed out that the basic recipe is fiscal consolidation in a combination with the necessary reforms - of the housing market, health care, social security, pensions, everywhere. All this generously powdered with investments. "We invested last year the biggest amounts ever - over 8 bn in railway and roads", Mr Rutte added. Probably here someone from Greece would argue that Greece cannot afford large-scale public investments because of the demanded by the Troika budget cuts, but here comes the investment plan to help.
Finland has not been in perfect shape lately and Prime Minister Alexander Stubb admitted that "in Finland, we probably did too little too late", but still this is one of the countries that have a huge experience with successful exit of a deep economic crisis. The most important thing, in his words, is to stop feeding the illusion that the public sector creates growth and jobs. It is the private sector that does that, he recalled. The task of the public sector is to do the structural change. In the second panel, dedicated on Europe's economic problems, the former finance minister of Spain and now minister of economy, Luis Guindoz, also emphasised that it is the structural reforms that matter. To Spain such a reform was the restructuring of the banking sector and the reform of the labour market. At the moment, Spain is scoring a tangible growth of lending. When the dynamics of the labour market is improved capital becomes much more mobile, he added. Despite the success, though, Spain is one of the countries where a populist party is gaining huge popular support.
At the moment, the main policy of the EU is structural reforms. This is valid for all the member states and in that sense Greece is not alone. Under the European semester the Commission sends every year specific recommendations to each member state which is in a macroeconomic imbalances procedure or excessive deficit procedure. The procedure for excessive debt has still not been applied but this will happen soon. Thanks to the reform of the economic governance of the EU the problems of all member states can very clearly be seen. In this regard, Germany's Finance Minister Wolfgang Schauble sent a very important message before the members of the economic committee of the European Parliament that he does not agree Germany to be viewed as the best schoolboy. Germany is strong in some areas but is looking for the experience of other countries in others. Even if Greece exited its adjustment programme, it will continue to be subject to monitoring and control and will again have to adhere to the recommendations of the Commission. This will be in a much tougher form than the others because of the debt but, in the end of the day, what is important here to take into account is the starting position. The Greek crisis started from a very bad initial position at national level.
Can we expect a new haircut of Greek debt?
For now the EU is cautious on this issue as the mantra goes that everyone is ready to work with the new Greek government, they are open for discussions but, it is reminded, that Greece has to be able to pay its debt. EU Economy and Finance Commissioner Pierre Moscovici is repeating the last few days that the Commission is on the side of the Greek people, that it is ready to assist Greece to stand on its feet, to create growth and jobs and to pay back its loans. Among the finance ministers, generally, there is not much understanding about the idea of further debt renegotiation. Irish Minister of Finance Michael Noonan said before the meeting of the Eurogroup on Monday that the problem with the Greek debt is not its GDP ratio but its price. He also recalled that 85% of the Greek debt is official, i.e. it is held by the IMF and the European taxpayers. This is an important reminder because often in the public domain it is said that the Greek voters voted for debt cancellation. In the same time it is forgotten that the German voters voted for the opposite.
Moreover, Mr Noonan emphasised, Ireland, too, contributed with 350 million euros to the Greek programme although the country itself was in an adjustment programme. The goal should be not to write off another part of the debt but the current expensive debt to be replaced with affordable debt. A price of 8.50% is unaffordable. According to him, there is a possibility for restructuring of the Greek debt. The strongest reaction to the elections in Greece and the demands of the newly elected Prime Minister Alexis Tsipras for debt cancellation, however, came from the chairman of the temporary bailout fund of the euro area (EFSF) and the permanent fund (ESM) Klaus Regling. He recalled that, so far, the EFSF has disbursed to Greece 141.8 bn euros and therefore it owns 44% of the Greek public debt. "We are thus, by far, the largest creditor of Greece and as such we have an obvious stake in the future of the country since the average maturity is over 32 years".
Mr Regling also recalled that the haircut in 2012 effectively achieved savings for the Greek budget of 8.7 bn euros which is 4.5% of the GDP per year. Then the maturities of the debt were extended and the interest rates were lowered. According to Klaus Regling, the net reduction of the Greek debt was 40%. He also said after the end of the Eurogroup that at the moment there is no debt overhang in Greece and that it is wrong to judge only by the debt-to-GDP ratio. There are other indicators that suggest that the country is completely capable to pay its debts as long as it sticks to the agreed reforms. The Eurogroup chief, Jeroen Dijsselbloem, said for his part that the election night did not change the Greek problems. They are still there.
Regardless of the pretences stated so far, the new minister of finance of Greece assured Dijsselbloem in a telephone conversation on Monday that Greece wants to stay in the euro area. "This is the basis for our future discussions", added the Dutch minister of finance. Such a wording is a hint that the EU will continue to put conditions which Greece will have to accept if it wants to stay in the eurozone (and the EU for that matter). This key message was expanded in much more detail by the ministers of finance of Italy and Germany who were heard by the economic committee of the European Parliament on Tuesday morning on the currently discussed reform of the economic governance of the EU and the new report of the four presidents which is expected to be presented in June. In front of the MEPs Wolfgang Schauble said that in the euro area everyone is equal and in order for it to be stable everyone should stick to the rules. The reallocation of blame should stop. The problems must be resolved at national level, he said and reiterated that the suffering of the Greek people was not due to decisions taken in Brussels but to the mistakes made by the Greek elites for decades.
Germany benefited from its euro area membership just like everyone else, Ms Schauble added. Why is Germany successful? Because it sticks to the rules. This means that these rules are not that bad after all, the German finance minister emphasised. He admitted that Germany was among the first countries to violate the rules. "We have learned our lessons from history", Mr Schauble assured.
Greece has other possibilities too
The situation Greece is facing is not as bad as it was 4 years ago. The country has already done huge reforms and has dramatically reduced its budget deficit. It is true that this has a price, but in the end of the day there is no country which did radical structural reforms not to have paid a high social price. The best example for this are the Baltic nations and especially Latvia which has just taken over the rotating presidency of the Council of the EU on 1 January. Latvia is the only country in the EU, apart from Greece, which sustained the same economic collapse but, unlike Greece, it is now among the countries with the most dynamic economic growth. In 2013 it was 4.2%. This year, the Latvian GDP is expected to slow down and grow by 2.9%. Latvia is also among the countries with lowest debt. The forecast for 2015 is its debt to be 36.3% of GDP.
According to Italy's Minister of Finance Pier Carlo Padoan, the key is when doing reforms to take into account the macroeconomic context so that their effect can be the strongest. In this sense, the flexibility is an important aspect, he said. And it is that flexibility Italy has secured that provides opportunities for manoeuvres for the Greek government. euinside wrote in detail about the interpretation of the EU's fiscal rules and the flexibility they contain. The most important of them is that the Commission will not take into account, when assessing the budget deficit, the spending on really deep pension reforms. The Commission will also close its eyes for spending on large-scale investments under the so called investment clause. A necessary condition, however, is these investments to have a positive, direct and most of all verifiable effect on the economic growth.
Generally, the flexibility existing in the EU rules is applied in a different way depending on the condition of the member state. The biggest benefits are there for the countries that are in the preventive arm of the Stability and Growth Pact, which means those that are under surveillance only. The Greek case is different because the country is under a special programme but the stated readiness by the EU for talks suggests that it is possible to renegotiate the current programme to insert more "flexibility" in the required reforms. Moreover, the country is determined to exit its programme soon. Wolfgang Schauble warned, however, that the flexibility per se is not a bad thing but it should not erode the trust in the rules. And although he is the hawk in the German politics, Schauble is not its only conductor.
Last week in Davos, Vice Chancellor Sigmar Gabriel made a fundamental admission. He said that in 2003 Germany started its structural reforms and is now picking the fruits. Then we knew we needed to invest in parallel with themq he said. "That is why we did not comply with the Maastricht criteria because the resistance would have been so great that we would have been unable to complete the reforms". So a successful model for Greece would be not to reverse the reforms but to continue them with the greatest possible flexibility granted on putting the conditions to enable achieving the two most difficult goals - growth and repayment of the debt. The latter is especially important because, although at this stage none of the other bailed out countries had not stated yet that if Greece gets another haircut they would demand one too, but this will be very demoralising. The best recipe, according to Pier Carlo Padoan, is to make the right balance between national responsibility, ownership of the programme and mutual trust.
Another possibility Greece can take advantage of is the long-awaited programme of the ECB to buy government debt. It will also not be without conditions but it is an option that neither Greece nor anyone else had before. The new Greek Prime Minister Alexis Tsipras is yet to clash with the realities and also with the moods in the EU. This will significantly change his rhetorics. The most important message that managed to pass through the hysteria with the Greek elections was that no matter the outcome it is a consequence of democracy. And democracy is fundamental to the EU. That is why there is nothing scary if parties different than the mainstream come to power. The Irish Finance Minister Michael Noonan called on Monday for respect for the choice of the Greek citizens and also Greece to be viewed as an equal member of the euro area. All these are not empty words but, still, a tango needs two. The EU has already reached out to Greece for a dance. It is Tsipras's turn. He has many successful examples before him, but may be the best is Italy because it is a southern country which is also sick but has turned into a policy-defining factor in the EU. Italy, as a matter of fact, too, has made a huge step forward in terms of political culture by electing a very young prime minister. Matteo Renzi is of the same age as Alexis Tsipras.
Renzi not only continued the reforms his predecessor Enrico Letta launched, but he has deepened them further. A very important part of them are of the political system - the electoral law, the functioning of the Italian parliament. Despite of all its problems, Italy's voice is heard in Europe. Greece can do the same if it chooses the constructive path. But if Athens offers only defiance there will be no success. Alexis Tsipras will work in a much more favourable European environment than any of his predecessors so far because the new European Commission is the first political one. This means that everything is a matter of negotiations. And for successful negotiations it is necessary both sides to make concessions.