As Greece Ends a Decade of Bailouts, Problems Linger for Europe
Posted June 19, 2018 8:57 p.m. EDT
As Greece prepares to emerge from one of the region’s most wrenching economic periods, its creditors are drawing up plans to ensure it is never a problem for the rest of Europe again.
European Union officials will unveil a blueprint in Brussels on Thursday to help the beleaguered country stand on its own once it comes off its third financial bailout in August. They have heralded Greece’s revival, and pointed to the closing of its bailout as a symbolic end to a ruinous financial crisis.
Although European leaders are marking the country’s apparent success, new problems are lurking elsewhere in the region, putting pressure on Greece’s still fragile economy. Britain is plowing ahead with its withdrawal from the EU. A trade war with the United States appears in the offing. The election of an anti-austerity government in Italy has revived fears about the euro, and jittery financial markets are again starting to target the currency union’s weakest links.
“The eurozone is most definitely not out of danger,” said Simon Tilford, chief economist for the Tony Blair Institute for Global Change in London. European governments still have not agreed to reforms that would insulate the eurozone economy if a new crisis arises, whether in Italy, Greece or over other issues like trade. “If the recovery peters out or there is shock of some kind,” he said, “the outlook will be much darker.”
Few places know tumult better than Greece. It had to impose capital controls in 2015, as millions of people protested in the streets. Twice, it nearly crashed out of the euro. The economy shrank significantly, joblessness skyrocketed and many were driven into poverty. The country has had to rely on three bailouts since 2010, totaling 320 billion euros (about $375 billion) overall.
European officials are now eager to paint Greece as a comeback story. The economy is growing again, albeit slowly. Unemployment has fallen from record highs, and investors are cautiously exploring whether to return. Prime Minister Alexis Tsipras has laid out a plan for growth, and is refusing the offer of a precautionary credit line, a financial safety net that would come with new austerity terms after years of belt-tightening.
Creditors will look to capitalize on that momentum. They are expected to announce an agreement on Thursday to ease the terms for Greece to repay its mountain of debt. Tsipras, who rose to power vowing to reverse austerity, is angling to be the leader who finally extracts Greece from its last bailout, which he agreed to in 2015.
While Athens will no longer officially depend on other people’s money, it faces an uphill battle to revive credibility in financial markets and restore growth.
Greece’s debt has ballooned to 180 percent of economic output — the largest in the eurozone. Though the economy is expanding, it is still only three-quarters of its pre-crisis size. And the governments, banks and institutions to whom Greece still owes staggering sums are bent on getting their money back, a feat that they say will require them to look over Athens’ shoulder for years to come.
Relief measures for the country have proved contentious as well. Germany, Europe’s austerity enforcer, has clashed bitterly with the International Monetary Fund over whether to ease up on Greece to help it cross the finish line. The fund, as a condition of its backing in the ongoing process, wants to ensure that Greece’s debt is sustainable. But its approach differs with Germany’s.
“Greece’s debt has actually become too big to fail, and too big to bail out again,” said Jens Bastian, a financial consultant in Athens and a former member of the European Commission’s task force on Greece. “The most important thing is that the creditors declare Greek debt sustainable, otherwise financial markets will take notice.”
The issue is particularly pressing because the recent tumult in Italy has shown that the euro’s problems have not been laid to rest. After Italy formed a new anti-euro government last month, investors punished Greece’s bond yields, a measure of creditworthiness. Officials in Athens are cleareyed on the effect that Italy has on perceptions of their own recovery. Greece is the last country to exit financial bailouts extended by the European Commission, the European Central Bank and the IMF — known as the troika of lenders. The rescues were intended to prevent the 19-country euro area from breaking apart when Europe’s sovereign debt crisis started in 2010.
Greece was the worst performer of any of the countries that received bailouts, including Ireland, Portugal and Cyprus. While severe budget cuts and tax increases restored market confidence, they deepened economic recessions and unemployment.
Greece remains weak, a point not lost on the commission, the EU’s executive arm, and the IMF. They are expected to require Athens to submit to a surveillance program and report four times a year on its finances and the economy.
To play it safe, Greece will not start selling bonds until well after it exits the bailout. Instead, the government, which is being advised by the Paris-based Rothschild & Co., will pick a moment in the next two years when market conditions seem favorable. A cash buffer of up to 18 billion euros, funded by creditors, may help Greece secure the liquidity it needs in the meantime. Much also depends on how Greece’s recovery unfolds. The economy has expanded modestly since last summer, and protests are now fewer and farther between as glimmers of a rebound emerge. In Athens and on the sunny Greek islands, tourists are packing hotels, bars and tavernas. Chinese and Russian investors are plonking money down on discounted residential and commercial real estate. Exports are rising, mainly on the back of refined oil products.
But those gains have yet to filter more broadly through the economy. Unemployment, which has fallen from a peak of 28 percent, is still stuck above 20 percent, the highest in the eurozone. Over half a million Greeks left during the crisis in a brain drain that has hampered a recovery.
Worryingly, more people are at risk of poverty, including large families and workers struggling with sharply reduced salaries and an explosion of precarious contracts. The Organization for Economic Cooperation and Development, a group of rich nations, warned recently that poverty in Greece had “risen dramatically.”
As part of his growth plan, Tsipras has vowed to reverse some of the harshest austerity after August. He wants to raise the minimum wage and possibly restore unions’ collective bargaining power, which was cut under the terms of the bailouts.
With creditors seeking to strike a deal before their meetings on Thursday, though, the Greek Parliament last week rushed to pass scores of additional austerity laws that the government had been delaying. They include deeper pension cuts, a broadening of the tax base to low-wage earners and new property and value-added tax increases. Those measures will kick in even after the bailout ends. Throughout, Greece’s creditors will be watching to make sure it does not backslide.
Klaus Regling, the German chief of the European Stability Mechanism, one of Greece’s lenders, told Tsipras during a visit to Athens last week that Greece had the potential to be Europe’s next “success” story.
“As long,” Regling added, “as it sticks to the agreed economic reforms even after the end of the third memorandum.”