On Monday, February 20 the Eurogroup convenes in Brussels with few, if any ,still hoping there will be a resolution on the latest Greek crisis. The shared hope in Athens and Brussels is that there will be a restart in the negotiation process at a technical level.
What could happen on Monday?
That kind of an agreement does not require Athens to agree on a particular target of fiscal measures. What must be recognized at this stage is that Athens must come up with a programme that ensures “structural savings” rather than one-off measures.
“Structural” entails politically tough measures such as pension cuts or limiting services. Pensions in Greece have been slashed 11 times since 2010, which means that there is little social tolerance for further fiscal consolidation measures.
Agreeing to that is politically difficult.
Besides, Athens sticks to its guns noting that Greece has fiscally overachieved, reaching a 2% primary surplus rather than 0,5% required. And rather than contracting, the Greek economy grew by 0,3%. The response is that although Greece has made it, the process does not look “sustainable.” Measures of the “structural kind” envisaged by the second review have not been implemented. The typical response is that “equivalent measures” have been taken to achieve the same objective.
He who has the gold sets the rules
Still, creditors was a “sustainable” budget surplus to the tune of 3,5% by 2018. That is the prerequisite for the IMF to recommit to the Greek programme. Brussels suggests that Athens is on course to outperform its target of a primary surplus – which excludes debt servicing costs – and projects 3,7%. The IMF expects 1,5% at the most.
There are two ways to achieve sustainability. The first is debt relief, which Athens and the IMF would prefer, and the second is cuts to the tune of 2% of the Greek GDP. That is what most Eurozone creditors would prefer. On Thursday, the Commissioner for Economic Affairs, Pierre Moscovici, said he was optimistic that a “political agreement” can be reached. Politically, the onus to prove the programme is viable lies in Athens.
Time and Pressure
Liquidity is not a pressing issue for the Greek government right now, but the €7,5bn payment due in June casts its shadow over the Greek economy. But, a waiting game is dangerous.
The risk of a self-fulfilling prophesy of underperformance that will lead Athens to further austerity measure to reach surplus budget objectives is real. None of that is unprecedented. And elections in a number of Eurozone member states can make things worse.
Data on the Greek economy earlier this week suggest that all fiscal projections are fragile. Over the last quarter of 2016, the Greek economy came to a standstill. And although there has been some notable drop in unemployment from 25,8% to 23%, the Greek economy is weak and anything but resilient. When the Greek Prime Minister, Alexis Tsipras, calls for an “Alliance of logic,” he is not just playing “hardball,” as in 2015. He is also reflecting on how much his narrow parliamentary majority can really deliver.
Naturally, with an open-ended possibility of Greece failing to service its debt, returning to bond market this March becomes impossible.
Upping the ante
Earlier on Thursday, the leader of the EPP group in the European Parliament, Manfred Weber, said that IMF participation is no longer crucial. In an interview with Sueddeutsche Zeitung, he stated that “if the IMF insists on a debt cut, then one should let it go.”
That puts debt relief off the table. To underscore this sentiment, German Finance Minister Wolfgang Schaeuble reiterated last week that Greece should really leave the euro zone if it failed to meet its bailout commitments.
In a pre-electoral period in Germany and the Netherlands, there are loud voices calling on Athens for further cuts in order to have the IMF on board. That is a strategy that has worked since 2010, but may be less relevant in 2017 not because there is more opposition from the Greek government, but because there is a real possibility Greece could go to the polls. That adds just another variable in a complex political equation in Europe.