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Expert Comment: The price for keeping the euro - last chance for Greece?

Greek flag Monday 13 July 2015

Associate Professor in Economics Archontis Pantsios looks at what the latest Greek bailout deal could mean for the country’s future. 

Following five months of protracted negotiations, two weeks of closed banks and capital controls, a referendum on a set of proposed measures by the Eurozone that was rejected by Greek voters, and a German threat (bluff?) to expel Greece from the Eurozone -‘Grexit’, the Greek government today agreed to a set of painful fiscal measures, and market and public sector reforms that will pave the way for further negotiations. The reforms will be voted on by the Greek Parliament in the next few days, and, if approved, will lead to a third bailout Memorandum of Understanding through which Greece is expected to receive from the European Stability Mechanism  - and most likely the IMF - further loans in the amount of ~85 billion euros (~£60 billion) in the next three years.

In the meantime, a special ‘bridge-financing’ programme will be discussed to meet Greece’s immediate loan payments. Finally, a special Holding Fund will be created in the amount of 50 billion euros to raise money through privatisation and the monetisation of valuable Greek state assets, part of which will be used to finance the re-capitalisation of the ailing Greek banks.

The new austerity package, while supported by all major pro-European opposition parties, will not only test the cohesion of the government coalition between the radical left SYRIZA and the small right-wing nationalistic party ANEL, but also the social and economic cohesion of the country. The government, failing to see its negotiating tactics come to fruition since the 25th January 2015 national elections that brought SYRIZA to power, and facing an extremely deleterious economic climate in the past two weeks, finally yielded to most of its creditors’ demands that the Referendum had supposedly rejected. These include Prior Agreement measures such as higher VAT taxes on most products and services, enlargement of the tax base, significant savings in the pension system and a system of automatic savings when targets are not met, which will be voted into law this week. Further trust-building measures include market reforms that liberalise markets along OECD’s Toolkit II, labour market reforms introducing more flexibility in layoffs, and public sector and judicial reforms.

Regarding the critical issue of the Greek public debt, while most agree it is not sustainable, the Agreement does not foresee at this point any reduction in its nominal value, but leaves open future discussions on its re-structuring via payoff duration extension. Finally, the Agreement also leaves open the use of a Growth Fund in the amount of up to 35 billion euros for investment purposes and SME financing in the next 3-4 years.

The above are certainly a far cry from the government’s pre-election promises of an immediate end to austerity brought on in the past five years, which saw great economic hardship as unemployment climbed to 27 per cent and GDP declined by 25 per cent, and constitute reconciliation with hard economic reality. The inactivity and five-month standoff will bring a huge cost to the Greek economy and it will take time before new trust is forged. Even when banks re-open, some form of capital controls will remain in effect and it will take time before the banking system will fully recover. Many of the fiscal measures are recessionary in nature and any hope of recovery lies with the will and the ability of the Greek political system to implement the necessary structural reforms. Changes are needed in both private markets, many of which are protected and regulated, and in the grossly inefficient public sector and judicial systems in order to make the Greek economy and public sector more competitive and efficient.

The immediate future is certainly not rosy for Greece: things will get worse before they get any better. However, it is Greece’s last chance to implement much-needed structural reforms. Eventually Eurozone itself needs to introduce major changes in its architecture if the Euro is to achieve long-term sustainability and avoid systemic crises, as adjustment in deficit countries via long and painful recessions can prove very costly and socially forbidding.  However, Greece’s future and national interests clearly lie within European institutions and the country must work patiently within European norms and practices in order to effect change, improve outcomes, and offer hope and viable prospects to its average citizen.


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