Greek finance minister

We Want to Keep the Euro

Source: Nikos Pilos für Handelsblatt
What's ahead for Greece's economy?
  • Why it matters

    Why it matters

    Greek elections pose a risk to euro zone stability if the country’s new government cannot agree with international lenders on its bailout program.

  • Facts


    • General elections in Greece are due on Sunday.
    • The country’s bailout program runs out next month.
    • Greece’s government debt level is forecast to fall slightly to 168.8 percent of economic output this year.
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Handelsblatt: Minister Hardouvelis, you’re a statistician. After Sunday’s elections, how likely is a Grexit within the next two years?

Gikas Hardouvelis: I think it’s a very low possibility because Greek people don’t want to give up the euro. The polls consistently show that three-quarters of Greeks definitely want to remain in the euro area despite six years of recession, despite the pain, despite the anger. For them, membership of the euro area is like a holy grail, an anchor that provides long-term political consistency and discipline. And I think that they also associate it with a sense of belonging to the West. It’s not just about economics; it’s also culture and politics.

You once said Greece might stagger out of the euro, what did you mean?

If there was a Grexit, it would be because Greece has been brought down to such a desperate condition and cannot meet its commitments to its citizens, if there is another huge recession like when we had 26 percent drop in economic power in two years, with people losing their jobs and no one outside Greece understanding what’s happening. But I think the risk of that happening is very remote. In the worst case, there would more likely be political changes than an exit from the euro.

So people’s fears abroad about what will happen after the election on Sunday are excessive?

Those are mainly economic fears. I don’t want to say who will win the election on Sunday, or what that means or recommend what one or another party should do. But I should emphasize that whoever takes power will face considerable constraints and will have to take action fast because any delays will have a negative effect on the economy.

Greek Finance Minister, Gikas Hardouvelis in the middle, with Georgios Kokologiannis and Nicole Bastian. Source: Nikos Pilos für Handelsblatt
Greek Finance Minister, Gikas Hardouvelis in the middle, with Georgios Kokologiannis and Nicole Bastian. Source: Nikos Pilos für Handelsblatt


What constraints would a new government leader face?

We need to complete the review of the second economic adjustment program for the rescue program from the E.U., ECB and IMF. We didn’t manage to finish it before we called the elections. We were close and the E.U. was happy with what we achieved so far. The new deadline is February 28. Only then can €7.2 billion flow into Greece. Most of that is a new loan. But €1.9 billion is a “free gift“ it’s part of the SMP profits that the ECB made by buying Greek government bonds. That’s a lot of money, it’s three-quarters of the real estate tax that people are complaining about. In order not to lose this money, it’s important we either manage to close the review by the end of February or we get an extension.

That’s being discussed in Brussels – you’re in favor of an extension?

This would be a reasonable solution, if the E.U. member states, the ECB and the IMF are willing to grant an extension, as the original time frame to complete the review has shrunk because there’s only one month after the election.

In the E.U. and in Germany, people are saying that if Greece does leave the euro zone, that wouldn’t be the end of the world. Can you understand that people in other countries fear a Grexit less?

Europeans fear a Grexit less because they think they have built up defenses. But I fear that the fact alone that they are more relaxed about such a scenario could lead them to take a tougher stance against Greece. That on its own could increase the probability of a Grexit if they don’t want to understand Greek problems and the cash needs Greece has and Greece is stuck alone. I think the belief that the euro zone could handle a Grexit in the long term is absurd. Assuming Greece leaves, that sets a very strong precedent in the next crisis everyone would concentrate on the question, who’s next? It would mean that one of the fundamental premises of building the euro area has been shattered.

Have you said that to Angela Merkel or Wolfgang Schäuble?

The German point of view is that you have to follow the rules and make reforms. We have to make reforms no matter which government comes next. The reforms usually have a short term cost for the political system. But what we’re talking about is a country with unemployment over 25 percent and youth unemployment of over 50 percent. The Greeks have paid an enormous price for the excesses of past decades. But the country benefits a lot in the long term. We have already done a lot but we have to keep going. But we have to talk with the troika about the fiscal situation in Greece.

How so?

Greece has managed to achieve a primary surplus in 2013 and 2014, so a surplus excluding interest payments on debts. We’re at a critical stage where the economy is about to take off. It’s important that the Europeans are a bit flexible vis-a-vis the Greek goals for 2015.

You want to achieve a primary surplus of 3 percent in 2015…

If the troika review is completed quickly, then achieving a primary surplus of 3 percent would be manageable. But due to the elections and the uncertainty, the economy has stopped growing. Contracts are being postponed, everyone has a wait-and-see attitude. If there’s a lot of discussion about targets and the reviews aren’t finished quickly and keeps Greece in a fuzzy situation for say three or four months, that may damage the economy. Greece might not be able to meet its fiscal targets and it would become a vicious circle. So it’s in everyone’s interest to close that review quickly and leave whatever is left for next year. The longer it takes, the worse it is for Greece’s economy and budget situation.

There will also be an impact on Greece’s liquidity.

Yes, in all we have to pay €4.2 to €4.3 billion for the first quarter, €2.8 billion of that is paying back a IMF loan from before. That money has to be found some where, if we haven’t received the €7.2 billion from the rescue program.

What would that mean?

Usually the way out is to borrow short term.

You mean short term T bills that Greece places on the bond market. But Greece has already reached the €15 billion ceiling the troika set.

The troika will have to raise the ceiling so we can at least pay this sum.

Do you want the troika to raise the ceiling to €20 billion?

In the short term. Because if Greece is forced to get the cash by delaying payments, that has a negative effect on the economy just when we were about to take off. The idea behind the ceiling was that Greek was not to keep borrowing and fix its fiscals. But we have an exceptional situation because of the elections. That’s why the troika should raise the ceiling.

How far are Greek banks struggling with their own liquidity problems?

The liquidity situation is tight and will get tougher in March. The ECB policy changes on March 1 in accepting some of the collateral that they accepted up to now which was guaranteed by the state, they announced that a year ago. So Greek banks need to substitute the guarantee with another type of collateral and that’s not easy to do.

In December, €3 billion of customers’ savings left Greek banks – is capital flight continuing and is that something you’re worried about?

There’s flight because of the current insecurity and the upcoming elections. But I think it’s under control, it hasn’t reached the 2012 levels. But we’re keeping an eye on the situation.

On Thursday the ECB will probably announce its step to quantitative easing. Do you still hope Greece might benefit from it?

I do hope Greece will not be excluded because Greece is the country that most needs quantitative easing. It is the country with the highest debt and where domestic interest rates are the highest. Theoretically because of deflation and the ECB’s goal of price stability, we are the ideal recipient of such a program. If you compare private sectors across Europe, the private sector in Greece is being penalized the most because it happens to operate in a country where the public finances are in disarray. Even healthy firms pay three or four more percentage points for loans than the same companies would pay in Germany, say. It’s a failure of monetary policy if these differences in lending rates across the euro zone continue. Greece should not only be not excluded from the ECB’s quantitative easing – but also monetary policy should allow central banks in countries with problems much more free credit.

Some say Greek government bonds don’t meet the quality standards…

The idea of quantitative easing was to give cheap credit for the ECB itself to come and buy bonds, reduce interest rates and give cheap loans. Even if you exclude all the economic problems that Greece has and only focus on the ECB’s monetary policy goal of price stability, then Greece has a high rate of deflation. Here you have a country that has a huge problem. Are you going to say as a monetary policy that I penalize it even more? The logical thing to do is to take special care of that specific region, especially if that quantitative easing starts when you still have a program in that region. Perhaps in March, if the state is showing that it still has a problem, then maybe you can worry and consider such a step. But to penalize the country now, in advance, doesn’t make sense to me.

Is it a problem that there are only three days between the ECB announcement and the elections in Greece?

The ECB shouldn’t connect the QE program with political developments. The elections are a separate issue. It should be separately. The focus has to be on price stability.

Do you think Mario Draghi has done a good job so far?

I guess he is trying, I remember that he has to deal with 19 different countries. It is not easy.

Would a second hair cut also help Greece, or would it be counterproductive because the trust in Greece would be affected?

As you know the haircut, if you are a borrower you always like it of course. The question is, is it reasonable to expect the rest of Europe to accept a nominal haircut? I think politically, it would be impossible because it would need to be unanimous. Plus it wouldn’t improve Greece’s finances until the year 2022 because we only pay the interest for the rescue program then. Greek debt is serviceable, it isn’t a huge constraint economic policy is facing now. But you could extend the debt terms and change the loans with variable interest rates to fixed rates. I think it’s more important for lenders to understand that the primary surplus we originally hope to achieve could be a bit lower because of the changed circumstances. The longer it takes to complete the review, the more flexible lenders will have to be for Greece’s targets.

Alexis Tsipras had the idea of an international debt conference, discussing possible reliefs in the debt of Greece is not…

…of immediate priority. I don’t want to say anything about candidates and whoever comes next. But if I were to look at the priorities, I think the priority is to make sure the economy takes off.


Nicole Bastian and Georgios Kokologiannis cover politics and finance for Handelsblatt. To contact the authors:,

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