One of the few areas of consistency in the Greek debt saga has been the extraordinary ability of all parties to avoid a full-blown crisis while at the same time failing to provide sustainable, long-term solutions.
After seven volatile years of negotiations and a seven-hour Eurogroup meeting on Monday of euro area finance ministers and the International Monetary Fund, a solution to Greece’s debt problem remains elusive. Another attempt will be made to reach agreement at the Eurogroup’s June meeting.
The clock is ticking. A release of further bail-out funds is essential if Greece is to avoid default when it is called to repay €7.4bn of maturing loans in July. A disagreement between Germany and the IMF on the latter’s participation in the bail-out programme lies at the heart of the stalemate. Berlin insists that IMF involvement is essential for Greece to receive its next tranche of funds. However, the IMF is reluctant to join unless clear guidelines have been agreed on easing the country’s debts once the rescue programme expires in 2018.
Although any measures would not take effect until 2018, it is difficult for Germany to commit to any such plans now, ahead of elections in September. The outcome reinforces Germany’s role as the dominant power in the euro area. French President Emmanuel Macron said before the meeting that his administration would be pushing for a debt relief deal for Greece. That was perhaps setting expectations too high for how much finance minister Bruno Le Maire could achieve in his maiden Eurogroup meeting.
A decision on the debt is crucial for deciding on the level of austerity needed to achieve primary surplus targets to guarantee Greece’s ability to repay. At Monday’s meeting Greece committed to running a primary surplus of 3.5% for four years after the end of its bail-out. To achieve this, the Greek parliament passed a number of austerity measures involving both pension cuts and tax rises. The measures succeeded in reducing policy uncertainty. Greek bond yields fell to their lowest level since 2012 while the stock market jumped. Bond yields rose again after Monday’s impasse but are still lower than they have been for most of this year.
In the short term, Greece’s economic prospects are looking bright. The economy is expected to recover having slipped back into recession when GDP contracted for two consecutive quarters in Q4 2016 and Q1 2017. Tourism, which accounted for over a quarter of Greek GDP in 2016, is expected to have a strong year in 2017. The tour operator Thomas Cook reported last week that revenues for summer bookings to Greece were up 36% for the first half of this year compared with last year. Greece is benefiting from political instability and safety concerns in competitor destinations such as Turkey, Egypt and Tunisia. The Chinese conglomerate Fosun International, which owns a stake in Thomas Cook, said that in the medium term it expects the number of Chinese tourists to rise from 150,000 to 1.5m.
The IMF’s World Economic Outlook predicts that the Greek economy will expand by 2.2% in 2017, one of the highest rates in the euro area. However, part of this growth is due to a low base effect as growth rates increase substantially after protracted periods of contraction.
There is plenty of reason for concern over Greece’s economic prospects in the medium term. The demographics are far from promising. The fertility rate, at 1.3 live births per woman, is one of the lowest globally. Emigration and a brain drain have intensified during the crisis. A study by the Bank of Greece estimated that 427,000 people left between 2008-16. Of those who stayed, over 23% are unemployed, with the figure rising to almost 50% for those aged under 25 (the highest levels in the EU). Eurostat, the European statistical agency, reported that 38% of children in Greece were at risk of poverty or social exclusion in 2015, compared with 29% in 2010 – the biggest increase for any EU member.
While Greece is not the poorest EU state (poverty rates are higher in Bulgaria and Romania), almost one in four Greeks are ‘severely materially deprived’. While the deprivation levels have dropped sharply in the post-communist Balkan states, the Greek rate has almost doubled since 2008.
Debt relief or restructuring should not be viewed as a panacea that will overnight solve all of Greece’s problems. But without it, the hopes for the next generation are dim.
Vicky Pryce, a former Joint Head of the UK Government Economic Service, is a Board Member at the Centre for Economics and Business Research and a Member of the OMFIF Advisory Board. She is the author of Greekonomics: the euro crisis and why politicians don’t get it, published by Biteback Publishing. Danae Kyriakopoulou is Chief Economist and Head of Research at OMFIF.