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As Greece Ends a Decade of Bailouts, Problems Linger for Europe
As Greece prepares to emerge from one of the region’s most wrenching economic periods, its creditors are drawing up plans to ensure it is never a problem for the rest of Europe again.
European Union officials will unveil a blueprint in Brussels on Thursday to help the beleaguered country stand on its own once it comes off its third financial bailout in August. They have heralded Greece’s revival, and pointed to the closing of its bailout as a symbolic end to a ruinous financial crisis.
Although European leaders are marking the country’s apparent success, new problems are lurking elsewhere in the region, putting pressure on Greece’s still fragile economy. Britain is plowing ahead with its withdrawal from the European Union. A trade war with the United States appears in the offing. The election of an anti-austerity government in Italy has revived fears about the euro, and jittery financial markets are again starting to target the currency union’s weakest links.
“The eurozone is most definitely not out of danger,” said Simon Tilford, chief economist for the Tony Blair Institute for Global Change in London. European governments still have not agreed to reforms that would insulate the eurozone economy if a new crisis arises, whether in Italy, Greece or over other issues like trade. “If the recovery peters out or there is shock of some kind,” he said, “the outlook will be much darker.”
As Greece prepares to emerge from one of the region’s most wrenching economic periods, its creditors are drawing up plans to ensure it is never a problem for the rest of Europe again.
European Union officials will unveil a blueprint in Brussels on Thursday to help the beleaguered country stand on its own once it comes off its third financial bailout in August. They have heralded Greece’s revival, and pointed to the closing of its bailout as a symbolic end to a ruinous financial crisis.
Although European leaders are marking the country’s apparent success, new problems are lurking elsewhere in the region, putting pressure on Greece’s still fragile economy. Britain is plowing ahead with its withdrawal from the European Union. A trade war with the United States appears in the offing. The election of an anti-austerity government in Italy has revived fears about the euro, and jittery financial markets are again starting to target the currency union’s weakest links.
“The eurozone is most definitely not out of danger,” said Simon Tilford, chief economist for the Tony Blair Institute for Global Change in London. European governments still have not agreed to reforms that would insulate the eurozone economy if a new crisis arises, whether in Italy, Greece or over other issues like trade. “If the recovery peters out or there is shock of some kind,” he said, “the outlook will be much darker.”
Few places know tumult better than Greece. It had to impose capital controls in 2015, as millions of people protested in the streets. Twice, it nearly crashed out of the euro. The economy shrank significantly, joblessness skyrocketed and many were driven into poverty. The country has had to rely on three bailouts since 2010, totaling 320 billion euros, or about $375 billion, overall.
European officials are now eager to paint Greece as a comeback story. The economy is growing again, albeit slowly. Unemployment has fallen from record highs, and investors are cautiously exploring whether to return. Prime Minister Alexis Tsipras has laid out a plan for growth, and is refusing the offer of a precautionary credit line, a financial safety net that would come with new austerity terms after years of belt-tightening.
Creditors will look to capitalize on that momentum. They are expected to announce an agreement on Thursday to ease the terms for Greece to repay its mountain of debt. Mr. Tsipras, who rose to power vowing to reverse austerity, is angling to be the leader who finally extracts Greece from its last bailout, which he agreed to in 2015.
While Athens will no longer officially depend on other people’s money, it faces an uphill battle to revive credibility in financial markets and restore growth.
Greece’s debt has ballooned to 180 percent of economic output — the largest in the eurozone. Though the economy is expanding, it is still only three-quarters of its pre-crisis size. And the governments, banks and institutions to whom Greece still owes staggering sums are bent on getting their money back, a feat that they say will require them to look over Athens’ shoulder for years to come.
Relief measures for the country have proved contentious as well. Germany, Europe’s austerity enforcer, has clashed bitterly with the International Monetary Fund over whether to ease up on Greece to help it cross the finish line. The fund, as a condition of its backing in the ongoing process, wants to ensure Greece’s debt is sustainable. But its approach differs with Germany.
“Greece’s debt has actually become too big to fail, and too big to bail out again,” said Jens Bastian, a financial consultant in Athens and a former member of the European Commission’s task force on Greece. “The most important thing is that the creditors declare Greek debt sustainable, otherwise financial markets will take notice.”
The issue is particularly pressing because the recent tumult in Italy has shown that the euro’s problems have not been laid to rest. After Italy formed a new anti-euro government last month, investors punished Greece’s bond yields, a measure of creditworthiness. Officials in Athens are cleareyed on the impact that Italy has on perceptions of their own recovery.
Greece is the last country to exit financial bailouts extended by the European Commission, the European Central Bank and the International Monetary Fund — known as the troika of lenders. The rescues were intended to prevent the 19-country euro area from breaking apart when Europe’s sovereign debt crisis started in 2010.
Greece was the worst performer of any of the countries that received bailouts, including Ireland, Portugal and Cyprus. While severe budget cuts and tax increases restored market confidence, they deepened economic recessions and unemployment.
Greece remains weak, a point not lost on the commission, the European Union’s executive arm, and the I.M.F. They are expected to require Athens to submit to a surveillance program and report four times a year on its finances and the economy.
To play it safe, Greece won’t start selling bonds until well after it exits the bailout. Instead, the government, which is being advised by Paris-based Rothschild & Company, will pick a moment in the next two years when market conditions seem favorable. A cash buffer of up to €18 billion, funded by creditors, may help Greece secure the liquidity it needs in the meantime.
Much also depends on how Greece’s recovery unfolds. The economy has expanded modestly since last summer, and protests are now fewer and farther between as glimmers of a rebound emerge. In Athens and on the sunny Greek islands, tourists are packing hotels, bars and tavernas. Chinese and Russian investors are plonking money down on discounted residential and commercial real estate. Exports are rising, mainly on the back of refined oil products.
But those gains have yet to filter more broadly through the economy. Unemployment, which has fallen from a peak of 28 percent, is still stuck above 20 percent, the highest in the eurozone. Over half a million Greeks left during the crisis in a brain drain that has hampered a recovery.
Worryingly, more people are at risk of poverty, including large families and workers struggling with sharply reduced salaries and an explosion of precarious contracts. The Organization for Economic Cooperation and Development, a group of rich nations, warned recently that poverty in Greece had “risen dramatically.”
As part of his growth plan, Mr. Tsipras has vowed to reverse some of the harshest austerity after August. He wants to raise the minimum wage and possibly restore unions’ collective bargaining power, which was cut under the terms of the bailouts.
With creditors seeking to strike a deal ahead of their meetings on Thursday, though, the Greek parliament last week rushed to pass scores of additional austerity laws that the government had been delaying. They include deeper pension cuts, a broadening of the tax base to low-wage earners and new property and value-added tax increases. Those measures will kick in even after the bailout ends.
Throughout, Greece’s creditors will be watching to make sure it doesn’t backslide.
Klaus Regling, the German chief of the European Stability Mechanism, one of Greece’s lenders, told Mr. Tsipras during a visit to Athens last week that Greece had the potential to be Europe’s next “success” story.
“As long,” Mr. Regling added, “as it sticks to the agreed economic reforms even after the end of the third memorandum.”
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Syriza's lies and empty promises
The ugly truth is that Greece is in a real mess and even debt restructuring will not get its economy going again.
In his televised address to the nation just a few days before yesterday's so-called bailout referendum, Greek Prime Minister Alexis Tsipras appealed to voters' emotions and their national pride and urged them to say "No". In turn, he assured them that he will personally find a solution with Greece's creditors, even though he failed to do so after five months of non-stop negotiations.
Greek Finance Minister Yanis Varoufakis continued in the same vein, promising a better deal within 48 hours if the country votes against the bailout package proposed by the eurozone officials on June 25, although he resigned (or was asked to resign) the day after the referendum in an obvious attempt on the part of the Tsipras' government to send a conciliatory message to Brussels and Berlin.
Apparently, political rhetoric worked its magic again with Greek voters as the "no" vote prevailed by a very wide margin in a ridiculous referendum over a proposal that was no longer on the table and while the bailout programme had already expired.
Master of lies
Indeed, in so doing, Greek voters seem to have forgotten that the Syriza government has evolved into a master of lies and deception.
At the June 22 euro summit, the leftist Greek government submitted a proposal that was very much in line with the logic of the infamous troika's bailout programme, although both Germany and the IMF still found it "insufficient" and placed demands for more blood and tears.
In addition, a few days after the decision for a referendum had been made, the Syriza government sought to get approval for a new two-year bailout programme, in exchange for 29 billion euros ($32bn), only to be turned again by the eurozone's hegemon, with German Chancellor Angela Merkel stating rather laconically that there can be no further talks before the referendum.
The latest gimmick of the Tsipras' government ... was made so the government would not collapse as many of its own MPs had stated that they would not support an agreement with the creditors...
But this is typical of how the Syriza-led government has been approaching negotiations with Greece's creditors for the past five months: defiance one moment and capitulation the next.
The latest gimmick of the Tsipras' government, ie, to call a referendum, was made so the government would not collapse as many of its own MPs had stated that they would not support an agreement with the creditors that reinforced austerity and anti-social policies that have shrunk Greece's GDP by more than 20 percent in the last five years, raised unemployment rates to stratospheric levels (over 25 percent), lowered standards of living significantly, and brought the public healthcare system to its knees.
So what happens next? Will the Greek government be able to reach an agreement with its creditors as quickly as Tsipras and Varoufakis believe, or have the odds of a systemic risk default (Greece has already failed to make a 1.5 billion euro - $1.7bn - payment to the IMF) and a Grexit increase dramatically because of the "No" vote?
Uncharted waters
Indeed, while Varoufakis was telling Greeks that an agreement with the creditors could be clinched in a day or two following a "No" vote, a few hours before the referendum he was hinting that the government is getting ready to face war-like situations.
But as already noted, lies and deception are Syriza's main tactics since it came to power in late January.
The truth of the matter is that the outcome of the referendum has put Greece and the eurozone in uncharted waters.
The ECB, which convenes today to take note of the latest developments in Greece, is highly unlikely to increase Emergency Liquidity Allowance (ELA) limits for Greek banks, which are already on the verge of collapse, but it is also most unlikely that it will make a decision to pull the plug on the Greek banking system so quickly.
Either way, Greek banks are expected to remain closed this week, thereby intensifying the agony for millions of depositors and bringing the economy under greater pressure.
The "No" vote will also strengthen the hand of those who prefer to see Greece out of the euro - and that includes primarily German Finance Minister Wolfgang Schauble.
The Greek government's belief that a "No" vote will force Europe's leaders to become "softer" towards Greece reflects a journey into self-delusion, thus making the Syriza government not only thoroughly incompetent but also dangerous.
If the pseudo-leftist government in Athens was serious in its desire to put an end to the five-year-old ordeal of the Greek nation caused by the austerity-driven dogma behind the bailout programmes, it would have called a referendum on whether or not Greece should remain in the eurozone.
As things stand, if the creditors continue to play hardball with the Tsipras government after the referendum, and Greek banks collapse, the transition to a national currency is simply inevitable.
The process of setting up a new currency could take months, and the Syriza government has no such plans in place, which means the Greek people will experience unspeakable pain...
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However, the process of setting up a new currency could take months, and the Syriza government has no such plans in place, which means the Greek people will experience unspeakable pain and suffering, particularly the poor, the working class and the most vulnerable segments of the population.
Referendum as experiment
Indeed, indicative of how dangerous this government really is, one of its own MPs assessed the banking situation in Greece, where capital controls are in place, limiting withdrawals to 60 euros ($66) a day, as one which is in the process of being "stabilised", and then went on to say that it will become even more stable as Greeks "get used" to the current situation.
In turn, the Greek minister of productive reconstruction, environment, and energy did not hesitate to describe the referendum that just took place as an "experiment".
Yet, an uglier truth is that Greece is in a real a mess and even debt restructuring will not be enough to get its economy going again. Aside from facing a severe competitiveness problem and mass unemployment, its pension system is on the brink of collapse.
In addition, Greece is a country with a uniquely rapidly ageing population while many of its best and brightest young people are leaving.
The country also needs to undertake deep reforms in its public sector institutions whether it stays in the euro or returns to a national currency.
These are issues and problems which any government would have to face regardless of its ideological orientation, and surely will not be solved on account of Sunday's referendum.
C J Polychroniou is a political economist/political scientist who has taught and worked for many years in universities and research centres in Europe and the United States.
The views expressed in this article are the author's own and do not necessarily reflect Al Jazeera's editorial policy.
SOURCE: AL JAZEERA
ABOUT THE AUTHOR
Political rhetoric worked its magic again with Greek voters, writes Polychroniou [REUTERS]
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