By: Krzysztof Głowacki and Klaudia Wolniewicz-Slomka, CASE Economists
Greece eyes graduation from its bailout program in less than nine months, but the EU and the IMF recommend less haste, more reform.
On Saturday, December 2nd, Greece’s Minister of Finance Euclid Tsakalotos announced that the country had reached an agreement with the European Union (EU) and the International Monetary Fund (IMF) on disbursement of a EUR 5 billion tranche of its bailout program, conditional on further progress with reforms. Specifically, Greece is supposed to push through two legislative packages encompassing fiscal measures, privatization, energy and labor market reforms, one before Christmas and one in January. All nineteen Eurozone Ministers of Finance gave a green light to the deal early last week, and Greek officials expressed hopes of leaving the current, third bailout program in August 2018 and making it their final one.
Greece’s problems were exposed by the global financial crisis, but pre-dated it: severe structural imbalances, in particular a bloated public sector harboring a sky-high public debt and a broken pension system, as well as poor international competitiveness, were all issues before 2008. To avoid imminent state bankruptcy — which could spill over and affect other Eurozone countries — the European Commission, the European Central Bank, and the International Monetary Fund, collectively known as the Troika, have sustained the country since the true extent of its sovereign debt issues became known. In return, the country had to live up to a range of macroprudential conditions, including on spending cuts, tax increases, and reforms, with the overall goal of bringing back financial stability and returning to market financing. Greece succeeded in implementing a number of socially painful but economically indispensable changes, including increasing VAT, raising the retirement age to 67 years old, and simplifying the process of bank liquidation.
The enactment of the latest series of legislative packages will be far from a formality, however, as portions of Greek society continue to resent or openly oppose the country’s cooperation with international financial institutions. This resentment has not gone unnoticed by the government. In fact, on December 4th, two days after reaching the deal, the cabinet withdrew a bill containing one of the agreed-on reforms, which would put a check on the right to strike by requiring that at least half of union members (rather than 20%), must support it for it to be legal. Despite the government’s capitulation, the next day saw riots in the streets, as protesters from the Greek Communist Party broke into the building of the Labor Ministry, clashing with the police in a violent display of retroactive and infantile fury.
In the meantime, 70% of the 110 prerequisites that Greece must complete in order to graduate from the current bailout program remain unfulfilled, according to Declan Costello, chief representative of the European Commission for the program. On this list are, among others, further pension cuts scheduled for 2019 and a lower personal allowance threshold scheduled for 2020. Painfully aware of the challenges that still lie in front of the country, the EU and the IMF advised its officials to focus on gradual progress in the reform effort rather than expecting ambitious graduation deadlines. The EU and IMF also reminded a somewhat optimistic Greece that it would have to comply with its obligations even after it graduates (or even if the International Monetary Fund steps down its support along the way).
Today, after many years of belt-tightening to compensate for its unsustainable pre-crisis spending, Greece is closer than ever to standing on its feet again. For the Greek government to finish this process, it must resist those who advocate the very same policies that put Greece in trouble in the first place.
