Greece concluded its rescue programme on Monday (20 August), marking a milestone in its recent history and the end of the most difficult period for the euro area, but analysts and officials said the country faces an uphill struggle to maintain its economy sustainable.
The saga of the first rescue package offered to a eurozone member in May 2010 also brought about the first default of a developed economy to the IMF and almost tore apart the eurozone in the summer of 2015.
But following eight years of cash-for-reforms assistance, including €326 billion offered by the EU and the IMF, Athens will exit the “toughest and longest adjustment path in Europe”, an EU official told EURACTIV.
“Without European financial assistance, the Greek economy would have collapsed, perhaps not recovering for decades,” Pierre Moscovici, the Commissioner for economic affairs, said on Friday.
“All EU economies would have been dragged, at least partly, into the Greek abyss,” he added.
But the design and results of the aid programme remain controversial as Greece faces a tough journey to full recovery in the years to come.
In order to facilitate Greece’s return to economic and financial autonomy, the Eurogroup agreed in June a set of measures to facilitate a soft transition to the markets.
Eurozone members offered a cash cushion totalling €24 billion to cover all its financial needs until summer 2020.
In addition, the finance ministers finally reviewed the terms of the country’s massive debt burden (mostly owned by eurozone members) to make it “sustainable”.
The Eurogroup postponed a large part of the payments until 2033 and prolonged the maturities by a decade to give more breathing space to the fragile Greek economy.
The opposition of European creditors, particularly Germany, blocked the IMF’s request to write off a substantial part of its massive debt.
But the bitter internal political battle, with elections scheduled for autumn 2019, external turbulences recently coming from Turkey and possibly soon from Italy, as well as the demanding fiscal targets imposed on Athens over the next half-century prelude further hardship for the nation.
For some, a fresh renegotiation of Greek debt (178% of its GDP, the highest in the EU), is inevitable. Others in the country and elsewhere consider it likely that a new aid program would be necessary.
Hinting at the tough times ahead, the EU’s main message to the Greeks is that the end of the program is only the beginning.
“Clearly, the reality on the ground remains difficult,” said Moscovici.
Although he said that the time for austerity is over, “there is still much work to be done so that Greece can stand on its own two feet.”
“Reducing public debt and pursuing reforms must be the government’s top priorities,” he added.
As from tomorrow, the Hellenic economy will become the first eurozone member to be subject to “enhanced surveillance”.
You did it! Congratulations to Greece and its people on ending the programme of financial assistance. With huge efforts and European solidarity you seized the day.
— Donald Tusk (@eucopresident) August 20, 2018
The goal is to ensure that Athens applies fully the agreed reforms and complies with the fiscal objectives, seen as “high and ambitious”, an EU source admitted.
Greece will have to reach a primary surplus (before interest payments) of 3.5% of its GDP until 2022, and reduce it to 2.2% until 2060.
Arguably, no other nation achieved such a balanced level of public accounts in a sustained manner over a long period of time.
Meanwhile, the country will have to finalise the cadastre and complete an ambitious privatisation programme to sell 19 ports, airports and other public assets.
If Greece backtracks or fails to implement the reforms, it could lose up to €4 billion meant to cover its financial needs over the next few years.
The Troika (Commission, IMF and ECB and the European Stability Mechanism) calls on Greece to improve the competitiveness of its economy, reduce the high level of unpaired assets of its banks and address an unemployment rate that still stands at 20%.
“Greece still faces many challenges,” Commission vice-president for the euro, Valdis Dombrovskis, said last month.
He told reporters that its weaknesses were “systematically addressed” by the hundreds of agreed measures between the Greek government and the troika. But he argued that “reforms take time to implement and bear fruits”.
However, a majority outside but also inside the institutions (Commission, IMF, European Parliament) agreed that the aid programme was flawed.
It averted a “disorderly default”, which would have arguably had worse economic and social consequences, a European Parliament report concluded in 2014.
But MEPs stressed that Greece and other rescued eurozone economies (including Ireland and Portugal) were victims of the lack of preparedness and experience of the EU institutions to bail out member states, and the lack of IMF instruments to deal with unsustainable economies within the limited period of the Fund’s programmes.
Four years were insufficient to turn the economy around after decades of negligence, poor tax compliance and misspending of successive Greek governments.
But the country was also the victim of the austerity drive that spread across Europe at that time. The result was a self-inflicted second recession in Europe and two aid programs for Greece that depressed its economy.
The toxic cocktail of fiscal cuts imposed by the IMF and the structural reforms requested by the Commission, with an initial negative growth impact, led to a cure that almost killed the patient. Greece lost almost 25% of its GDP since 2010 and unemployment reached 28% in September 2013.
Greece paid for the errors of the IMF or Commission officials, but also of their political superiors.
When the second bailout was nearing completion and the country already tested successfully investor confidence with a small debt issuance, the Eurogroup rejected at the end of 2014 the request of the then Greek Prime Minister, Andonis Samaras, to exit the programme leaving some minor targets unfulfilled and offering some breathing space to the Greeks.
The rejection ultimately led to snap elections and the victory of far left-wing Syriza.
The aim of the party leader Alexis Tsipras and his flamboyant Finance Minister Yanis Varoufakis was to end the troika’s tutelage with a haircut on Greek debt.
After half a year of tense negotiations, which brought Greece close to the eurozone’s exit door, Tsipras ended up accepting a demanding third aid program in July 2015, rejected days before by Greek voters in a controversial referendum the prime minister called.
Greece exits this third lifeline today on Monday with a primary surplus of 4.2% of GDP and an economy that is expected to grow above 2% over the next two years.
But the price to avoid bankruptcy, clean up the public accounts, reform its economy and remain within the euro may have been too high.
“There are no plans for a fiesta,” the leader of SYRIZA’s parliamentary group, Costas Zachariadis, said on Friday, referring to the exit.
He recalled that a large part of the Greek population continues to have serious financial problems.
The proximity of bankruptcy forced the combative Tsipras to give in three years ago. The Syriza government also benefited from the tailwinds of ECB’s low interest rates and the fall of oil prices.
But now that the country has regained some fiscal space, the truce between Athens and Brussels is at stake. Tsipras wants to adopt a tax reform to attract middle-class voters ahead of next year’s election with the surplus achieved over the fiscal target for this year (3.5% of GDP).
The Commission has warned that, even outside the program, the troika must be consulted under the ‘enhanced surveillance’ for any reform.
Furthermore, the end of the ECB’s monetary stimulus, together with the rise in oil prices, aggravate the ongoing political instability inside and outside the EU. Market turbulence will reflect that Greece remains vulnerable in the eyes of investors, as was seen in recent days following the crisis of the Turkish lira.
Although Greece has a year and a half before returning to the markets to borrow, investors are very cautious about its economy and the terms of its exit from the bailout.
Europeans went too far when they designed the cure. And probably they fell too short in lightening the burden now that the country is about to leave the lifeboat. If any lesson can be learned from the Greek tragedy, it would be that it is better to correct on time than to regret later.