Greece: Slumping Towards Permanent Crisis

After the dramatic negotiations surrounding Greece’s debt crisis in July, European leaders launched a new aid programme for the ailing country. What does this mean for the future of the eurozone?

In 2014, Greece’s economic situation still showed signs of hope. Over the first three quarters its economy grew, and there was a reasonable chance that Greece might recover from the long and deep crisis of the preceding five years. However, after Syriza’s victory in the January election and its announcement to stop the economic reform programme agreed with the creditors, the situation took a turn for the worse. The capital flight, which eventually forced the government to close the banks and impose temporary capital controls, further intensified the economic difficulties. Along the way, Greece’s ability to service its debt deteriorated markedly, plunging the country deep into the red.

The response of the eurozone was to write up another rescue programme which includes a new aid package of 86 billion euros. Are there reasons to believe that things will turn out differently this time? First, the new programme gives the country more time before it is expected to produce a significant primary surplus. But at the same time, thanks to the Syriza government’s incoherent economic policy, Greece’s ability to produce surpluses has suffered severely. The European Commission forecasts a primary deficit in 2015, which Greece is expected to turn into a primary surplus of 0.25 per cent of GDP in 2016 and 1.75 per cent in 2017.

Second, the politically sensitive question of debt relief has been left open – the memorandum of understanding says that relief in the form of longer maturities at low interest rates may be granted if the first review of the programme is positive. But how large this debt relief will be is unclear. Whatever the outcome of the review, it is crystal clear that Greece will be unable to fully service its debt without external help. Denying debt relief is hence not really an option.

Third, the programme includes an impressive number of economic reform measures which, if implemented, would be extremely helpful. The trouble here is that there has never been a lack of reform lists; implementation is the challenge. Alexis Tsipras has repeatedly stated that he does not believe in the reform programme and that he has signed off the list for only one reason: There was no other way to keep his country in the eurozone. The Greek population rejected a similar, but less ambitious list of reforms in the recent referendum.

The fourth key element is the newly invented privatisation fund. The goal is to sell off 50 billion euros worth of state assets. This will be extremely difficult to achieve. It should also be kept in mind that Greece, by selling its assets, will also lose the revenue those assets generate. Privatisation can improve the financial situation of a country only if it leads to improvements in efficiency that are factored into selling prices, or if it boosts general growth. And there are two additional challenges: The programme will not help Greece to become more competitive in terms of prices – rather the opposite, as taxes will increase. Moreover, uncertainty about whether or not Greece will stay in the eurozone will hold back investment.

Some people argue that the other eurozone countries should make a commitment to rule out Grexit for the future. Given the fact that only the threat of an end to transfers, with the consequence of a Grexit, has led Alexis Tsipras to accept conditionality of help at all, this idea is quite naïve. Also, since Greece is a sovereign country, nobody can prevent the country from leaving the euro if it wants to do so.

To sum it up, the chances for Greece to achieve economic recovery under the new programme are slim. It would have been more promising to let Greece exit from the eurozone while keeping it in the EU, forgive most of its debt, and let Greece decide freely and democratically which economic reforms it wants to undertake.