Athens — Greece’s latest economic reforms will be key to winning debt relief that unleashes years of pent-up investment and finally ends its economic crisis. Or the austerity will crush the economy and send the government cap-in-hand for another bail-out.
We will soon find out.
After data this week showed the economy slipped back into recession in the first quarter, legislators on Thursday approved the latest economic measures demanded by creditors to keep the bail-out loans flowing. The danger is that if efforts to hit ambitious budget goals choke the economy so much that the target is missed in 2018, pension cuts and tax increases will tighten the noose further.
"The Greek economy finds itself at a crucial crossroads," said Nikos Vettas, head of the Foundation for Economic and Industrial Research in Athens. "It’s roughly at the same level as three years ago, and while many forces that built a negative dynamic since the start of the crisis are now weaker, there is no guarantee it will enter a sustainable growth phase."
If Greece gets a substantial enough commitment on debt relief from eurozone creditors, that in turn could restore confidence and allow investment to flow into the real economy. A deal of this kind will be discussed at Monday’s meeting of eurozone finance ministers in Brussels.
Greek markets rallied in May following the conclusion of a preliminary agreement with eurozone creditors and the International Monetary Fund (IMF). Uncertainty in the run-up to that deal is blamed for putting the country back in recession and causing the government to cut its 2017 growth forecast to 1.8% from 2.7%.
Under the optimistic scenario, a debt agreement that satisfies the IMF makes it easier for the European Central Bank (ECB) to include Greek government paper in its asset-purchase programme and the public debt agency to resume bond issuance this year. That triggers a stream of foreign investment chasing returns in a the country where the central bank says GDP is almost 10% below potential.
"The agreement with the creditors entails some recessionary measures, including the requirement to deliver rising primary surpluses" in the next few years, said Nikolaos Karamouzis, chairman of Eurobank Ergasias, the country’s third-biggest lender, and of the Hellenic Bankers Association. "This negative impact would be more than offset by a better market and economic climate, QE [quantitative easing] participation and viable public debt restructuring."
In exchange, Greece is going to have to sustain its budget surpluses for longer than the government had hoped. Dutch Finance Minister Jeroen Dijsselbloem, who chairs the group of eurozone finance ministers, on Thursday proposed the primary budget surplus should be at least 3.5% of GDP for five years from 2018, something the IMF has said will exact a huge price on the Greek economy, if it can be achieved at all.
Thursday’s budget package included €5.4bn of stimulus measures for 2019 and 2020 to offset the pension cuts and tax increases demanded by creditors. But the catch is that this stimulus will only kick in if Greece meets budget goals.
The government says it will meet its target, pointing to a 4.2% primary surplus 2018 compared with a target of 0.5% as evidence that the IMF is too pessimistic.
Ilias Lekkos, chief economist at Piraeus Bank in Athens, is not convinced.
"There’s no precedent for a non-oil exporting country achieving a 3.5% primary surplus systematically for a period of many years," he said. "It either can’t be achieved, or it will be achieved at the cost of a huge recession."