Greece’s Never-Ending Fiscal Drama
Bailout program is held up by a dispute over country’s budgetary targets
No one wants another Greek debt crisis, least of all just ahead of a series of knife-edge elections in Europe. No one this time is trying to push Greece out of the eurozone. No one thinks what Greece needs now after eight years of acute depression is another dose of austerity. Nor does anyone seriously think Greece’s current debt burden is sustainable. So why is Greece once again back in the headlines, its future in the eurozone again called into question amid yet another standoff with its creditors?
The official explanation is that Greece’s bailout program is being held up by a dispute over the country’s fiscal targets. Under the deal struck in 2015, Greece is supposed to achieve a primary surplus before interest payments in 2018 of 3.5% and maintain this surplus for the medium term. Germany says medium term should mean 10 years; the European Commission would prefer it to mean one or two years. This matters because Germany has said it would only continue to fund Greece’s bailout if the International Monetary Fund puts money in too—and the IMF will only participate if the numbers add up. The lower the surplus target, the bigger the debt relief needed to make the numbers add up. That is a problem for Germany.
To make matters more complicated, the IMF takes a very pessimistic view of Greece’s current fiscal position. It now seems clear that Greece delivered a primary surplus of at least 2% in 2016, far above the initial program target of minus 0.5%. With the Greek economy now growing, the European Commission is confident the country can achieve the 3.5% target for 2018 with few extra fiscal measures. But the IMF says this year’s surplus was largely due to one-off factors and is sticking to its forecast that the surplus will only amount to 0.9% in 2018. Just to reach the 3.5% target in 2018, the IMF says Greece will need to legislate in advance extra austerity measures equivalent to 2% of gross domestic product. Athens says this is politically impossible. Brussels agrees.
Of course, this dispute isn’t really about deficit targets. At its heart lies a fundamental clash over how the eurozone should operate. Germany and the IMF share an extremely low opinion of the quality of Greece’s political class and institutions. But from this they have drawn different conclusions. Berlin believes Athens can’t be trusted to stick to any fiscal or reform commitments except under strong external pressure; it follows that if Greece is to remain in the eurozone, it needs to be kept on a short leash. Berlin will keep funding Athens, but it wants to maintain leverage over the country’s economic decision-making to protect German taxpayers.
But the IMF sees this as a recipe for perpetual can-kicking fundamentally at odds with its own institutional priorities. The IMF exists to provide short-term assistance to countries in financial difficulties, helping them put their finances so they can return quickly to borrowing from the financial markets. The IMF’s credibility has already been battered by one failed Greek program and is determined not to be sucked into another. For the IMF, therefore, this Greek program must be the last—and given its extreme low confidence in the Greek political class, a program is unlikely to be successful without very substantial debt relief. The IMF’s position has been clear for two years, but many Europeans assumed it was bluffing.
How this standoff now gets resolved is far from clear. One option is that Greece capitulates to what many in Europe consider to be the IMF’s unreasonable austerity demands. But could any Greek government of any stripe deliver austerity measures worth an additional 2% of GDP? Another option is that Germany capitulates on the deficit targets. But could Berlin execute such a humiliating U-turn, committing to writing off more than €100 million ($107 million) of Greek debt just months before an election? Another option would be for the IMF to walk away from Greece altogether, leaving the eurozone to sort out its own mess. But how could it do this without pulling the rug from under German and Dutch participation too, making Greece’s plight far worse?
Greece’s best hope is that a compromise can be thrashed out in which Berlin accepts lower medium-term surplus targets, the IMF adopts less gloomy forecasts, and Athens is left to legislate a much smaller package of extra austerity measures. But a compromise along these lines currently looks some way off. Meanwhile the clock is ticking. The Feb. 20 meeting of eurozone finance ministers is the last chance to agree on a deal before the Dutch parliament is dissolved ahead of that country’s general election in March. The next opportunity to strike a deal might not come until after the French presidential election in May. By then all the current momentum may be lost, including a package of ambitious reforms currently agreed as part of the program review. Worse, a giant bond redemption in July will be looming, raising the risk that Greece finds itself back where it was in 2015—exactly where no one wants it to be.