Independent report unveils flaws in Greek bailout

Former EU commissioner, Joaquín Almunia, was the independent evaluator picked by the ESM governors. [European Commission]

Eurozone creditors who designed and supervised Greece’s bailout paid “insufficient attention” to the Greek social needs, had inadequate strategies and pursued damaging fiscal adjustment in the bailout programmes agreed with Athens, an independent evaluation concluded.

The report, published on Thursday (11 June), was led by former EU Commissioner Joaquin Almunia. The Spanish socialist was tasked by eurozone finance ministers in February 2019 with conducting this assessment. The ministers are also the governors of the European Stability Mechanism, the eurozone’s bailout fund. 

Almunia said on Thursday that the support provided to Greece had helped to keep the country in the euro area, preserve the integrity of the currency union and support the stabilisation and growth of the Greek economy.

“At the same time, Greece and its citizens suffered the consequences of eight years of very hard economic adjustment,” Almunia added.

The report further increased the “concerns” for setting up bailout programmes with the proper design, having in mind social priorities, the right governance and transparency, he told reporters during a video press conference.

The 167-page document also included recommendations for future programmes that will help the ESM to enhance its ability to tackle future crisis, Almunia added.

The €204 billion aid given to Greece since 2010 by its eurozone partners, via the ESM and its predecessor, the EFSF, helped to prevent the country’s exit from the eurozone (Grexit) and restore its financial stability. But those primary objectives were fulfilled “at a considerable financial and social cost”, the report concluded.

Greece exits bailout programme but faces hard times ahead

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 cash-for-reform bailout “lacked a framework to systematically develop strategic programme objectives, resulting in inadequate strategies,” it added.

Part of the difficulties derived from the lack of a common diagnosis of the Greek problems between Athens and its creditors, which “reduced chances of a durable success.”

In addition, the Eurogroup and the institutions (European Commission, ESM, European Central Bank, International Monetary Fund), responsible for designing and implementing the programmes, paid “insufficient attention to the underlying social needs of the Greek population.”

One of the problems flagged by the report, and constantly voiced by Greek officials in the past, was that the strict fiscal targets imposed by the creditors were damaging for the country’s economic growth.

The fiscal targets were “not conducive to inclusive growth, and lacked a long-term economic outlook,” the report said.

“The ESM programme failed to systematically and vigorously pursue the objective of longer-term macroeconomic sustainability and resilience,” it added.

Lack of independence 

The report also noted important flaws at the operational level. For example, communication was not successful, as the reforms and their benefits “were not well explained” to the Greeks. 

Moreover, it also questioned the independence of the ESM staff involved in the programme. The national preferences of ESM officials “at times hampered the Institutions’ ability to effectively design and negotiate policy measures”.

The document acknowledged that the debt sustainability of the country is improved “but not fully restored”. Greek public debt is projected to skyrocket to 196% of its GDP this year due to the coronavirus crisis.

In addition, the resilience of the baking sector remains “weak”. And despite the progress made in reducing inequalities, the report noted that income inequality remained above the euro area average, and that the overall poverty rates and unemployment stayed relatively high due to ineffective measures to create jobs.

Following the discussion about the report with Almunia, the ESM governors agreed that the social impact and long-term growth are important.

“While noting the considerable economic and social costs of the crisis to Greece, they stress the overall benefit of the programmes in providing indispensable financial support to Greece following its loss of market access, and in preserving the integrity of the euro area,” the ESM said in a statement.

“The absence of the financial assistance would have resulted in a substantially costlier outcome both for Greece and the euro area, with unforeseeable negative effects,” it added in a reference to a potential ‘Grexit’.

Eurozone equipped to save big economies, says euro rescue fund chief

The European Stability Mechanism, the euro area’s rescue fund, would have enough firepower to save large economies if necessary, including Italy, the fund’s chief Klaus Regling said on Tuesday (29 October).

The report came with a long list of recommendations for future bailout programmes, including a more strategic approach during the design phase, improved governance, better coordination during the implementation phase, and “a strong and coherent framework” for post-programme monitoring.

The eurozone finance ministers said that some recommendations could fall under the ESM reform agreed in principle last December. 

They also invited the ESM management to follow up on the recommendations to improve their internal working methods.

[Edited by Zoran Radosavljevic]

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