Greek abyss and EU fault line

Greek abyss and EU fault line

Angelo Santagostino*
On the brink of the abyss, will they be able to reach an agreement? This is the key question of the infinite drama. Needless to say, the dramatis personae are the Greek government and their creditors. On the night of July 10, after a sort of ultimatum received from the so-called Brussels Group - formed by the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) - in the aftermath of the results of the referendum, the Greek government submitted a reform plan which was more credible than the previous ones. The following are its main features: Three value-added taxes ranging from 6 percent (for medicine, books, etc.), to 13 percent (for food, energy, hotels, etc.) and finally to 26 percent (for restaurants, etc.) will be introduced. The tax exemption for the Greek islands will be eliminated from October this year, starting with the most famous ones, like Santorini or Mikonos. A more stringent pension reform increases the minimum retirement age to 67 and introduces penalties for those who choose early retirement. The plan will also privatize airports and ports as well as include a primary surplus of 1, 2, 3 and 3.5 percent of the GDP for 2015, 2016, 2017 and 2019, respectively.  The total cost of the plan is 13 billion euros, an increase of 5 billion euros over the previous estimate of 8 billion euros. This extra cost is the consequence of the delay in the negotiations and the worsening of the economic situation of the country. Greece has also asked for a loan from the European Stability Mechanism (ESM) of 50 billion euros.

Greece’s economic situation is rapidly worsening. A zero comma growth appeared in 2014, and a 2.5 percent rate was forecast by the European Commission for this year. Then the advent of Syriza once again pushed the country into recession. According to the last forecast, the GDP contraction could be about 3 percent this year. 

Tsipras on July 11 obtained the mandate to negotiate a reform package from a large majority of parliament. Now the ball is entirely in the hands of the EU. Also on July 11, the Eurogroup discussed at length the new proposal. There are two crucial points: debt and confidence. 

The debt is now at 180 percent of the GDP, and last week the IMF released a report reiterating that this was unsustainable and required at least a lengthening of deadlines, if not a real haircut. The problem is that, by statute, the debt of the fund cannot be restructured. Tsipras asked for a debt cut of 30 percent “to be able to return the money.” The ECB cannot accept any haircut, as this operation is forbidden by the treaty. Therefore, the only viable solution would be that of a combination of restructuring (from the ECB) and diminution of interest rates (from the IMF). 

Confidence in the Greek government’s capacity to implement the reforms is at a minimum. The basic fact is that the last plan is tougher than the one that was rejected on July 5 by the electorate. The referendum has tremendously complicated the panorama. The situation is such that in Greece there is now a government which has the mandate from the parliament but not from the people. Furthermore, implementation of the agreed measures in the past was very weak. Face to this situation that Germany and Nordic creditors have advanced the request of a fund in which the country would pour 50 billion euros. Alternatively, German Finance Minister Wolfgang Schauble has asked for a five-year “Grexit,” a period sufficient for Greece to restructure its debt - a proposal not compatible with the rules of the monetary union. The paradox is that the same Germany who is blaming Greece for not to respecting the rules, is now is proposing a Grexit against the rules. The ways of politics are infinite…

The final act of the drama is still to be written but a tragedy has to be avoided. Beyond Greece, the problem is that of a Europe divided between the Central European and Scandinavian intransigence and Mediterranean Europe, France included, and greater availability and flexibility. It is a fault line which could produce an earthquake. 

*Angelo Santagostino is the Jean Monnet ad personam chair in European Economic Integration at Yıldırım Beyazıt University in Ankara