Downplaying Debt

Damage Control Rules Greece Policy

File photo of German Finance Minister Wolfgang Schaeuble as he addresses a news conference to presents budget plan 2017 in Berlin
German Finance Minister Wolfgang Schäuble long supported a temporary Grexit, but has since campaigned for the next aid package, calling it an "opportunity for a new beginning in Greece."
  • Why it matters

    Why it matters

    With the looming possibility of a Brexit, the last thing European politicians want is more problems with Greece. They will likely approve another €86 billion in rescue funds for Athens despite its failure to make economic improvements.

  • Facts

    Facts

    • German Finance Minister Wolfgang Schäuble long opposed continued aid for Greece but is now behind Chancellor Angela Merkel’s support for another aid package.
    • Greece’s donors have postponed payment of billions in promised rescue funds because Athens is months behind in implementing promised measures.
    • Since the first aid program, Greece’s debt has grown to 176 percent of its GDP.
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  • Audio

    Audio

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“We will not have a major Greek crisis this year,” German Finance Minister Wolfgang Schäuble recently declared. But the question, increasingly, is whether Mr. Schäuble’s statement was a promise or a wish.

In Greece, the unions are trying to shut down the country and protesters are once again throwing Molotov cocktails on Syntagma Square in Athens, while Prime Minister Alexis Tsipras risks losing his government majority by pushing through another austerity package.

In any other European country, all of this would amount to a crisis. But after six years of ongoing rescue and countless austerity packages, many Greeks have become fatalistic. There is no evidence out there that the situation might improve in the country. To the contrary, things seem likely to go downhill.

The option of withdrawing from the euro zone hovered above the country last summer as one possible solution. But to prevent this from happening, Greeks agreed to further austerity and reform measures in return for the promise of €86 billion ($98 billion) from the euro rescue fund.

Somehow, a compromise must emerge in the end. But how long will it last?

This third rescue program was finally expected to turn things around. Even Mr. Schäuble, long an avid supporter of a temporary Grexit, ultimately bowed to Chancellor Angela Merkel’s decision and campaigned for the aid package, calling it “the opportunity for a new beginning in Greece.”

But half a year later, there is no sign of a new beginning. Instead, it all feels like another chapter in a seemingly never-ending drama. Once again, the Greek government is lagging months behind with implementation of austerity measures it promised to put in place. And once again, Athens faces bankruptcy as donors punish its perceived profligacy with the postponement the next bailout tranche worth billions.

It is highly likely that the money will arrive just in time, as has so often been the case in recent years. After all, in light of the upcoming Brexit referendum, the last thing the Europeans need is another major problem.

But experience shows that this will bring Greece little more than a few billion euros to convert old debt into new debt. The country’s economic output has declined by a quarter since the first aid program, while its mountain of debt has grown to 176 percent of its gross domestic product.

Meanwhile, all the parties involved have grown less interested in Greece’s economic recovery than in minimizing the political damage at home after six years of ineffective bailout programs.

This applies, most notably, to the Greek government. Mr. Tsipras is trying to shirk reforms that are controversial among his supporters.

He also wants to wrestle debt relief from Greece’s creditors, even if it won’t provide him with a single cent in the next four years, as the loans from euro countries have already been deferred until 2020. But debt forgiveness would be a political victory for Mr. Tsipras, who seems to value his job as prime minister more than the state of government coffers.

Still, the creditors, most notably the German government, are similarly motivated by self-interest. Given the approaching national election in Germany, Ms. Merkel and Mr. Schäuble want to avoid unwelcome parliamentary resolutions. One of those would be a relaxation of budget objectives.

The experts with the International Monetary Fund, not exactly known for their love of Greece, believe it is beyond unrealistic to expect Athens to achieve a 3.5-percent primary surplus in 2018. Reaching the goal, come hell or high water, by piling on the austerity measures, is also “counterproductive,” warned IMF Managing Director Christine Lagarde.

But Ms. Merkel and Mr. Schäuble are having trouble selling the idea of relaxing the austerity requirements, or that of the possible debt relief the IMF is calling for. The IMF has a longer-term outlook and believes that investors will only return to Greece once the government is clearly in a position to carry its debt.

And while one doesn’t necessarily have to agree with this view, the fact is that the IMF has made debt relief a condition of its further participation in the aid program. And Ms. Merkel and Mr. Schäuble prudently want to keep the IMF on board, if only to avoid a revolt within their center-right Christian Democratic Union’s parliamentary group.

Somehow, a compromise must emerge in the end. But how long will it last? The half-life of resolutions on Greece has decreased considerably in the last six years.

 

To contact the author: hildebrand@handelsblatt.com

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