Talk about possible trade wars with China and the Brexit negotiations has crowded the Greek debt crisis out of the headlines, but a new decision point is approaching. It is possible that this time the beleaguered Greek government will announce a withdrawal from the Eurozone, if only to drive home the point to other European governments that the status quo is not acceptable. But those governments, facing resistance from voters suspicious of foreign engagements, may not offer terms acceptable to the Greek government. Moreover, the IMF does not want to approve the next stage of a bailout agreement that it believes is not credible. Consequently, each side may feel pushed to accept an outcome it knows is not optimal. If that comes to pass, the consequences for the Eurozone will be far-reaching.
Greek economic performance, after years of contraction, has stabilized. The IMF projected that GDP, after stagnating in 2016, would increase in the current year by 2.8%. But the ratio of gross debt to GDP, according to the IMF’s projection in last fall’s Global Stability Report, was 183.4% last year, up from 176.9% in 2015 and 180.1% in 2014. Moreover, a draft report from the Fund projects continuing growth in the debt burden, ultimately reaching a crushing 275% in 2060.
The IMF’s concerns come as European governments are assessing Greek compliance with its current bailout agreement. Greece needs a successful review to qualify for disbursal of about $90 billion, which the government requires for debt repayments. Greece has met its recent fiscal targets, but the agreement calls for a 3.5% primary budget surplus target by 2018. The IMF fears that this is not achievable without a degree of fiscal austerity that would kill off the incipient recovery. Not everyone shares the IMF’s apprehensions, and the agency that administers the European Stability Mechanism has issued a positive assessment. But if the IMF does not approve the next stage of the bailout, at least some European governments will not want to proceed.
George Papaconstantinou in Game Over has provided an insider’s look at the outbreak of the crisis and the course of negotiations in the early years. Papaconstantinou, who earned a Ph.D. in economics at the London School of Economics, served first as Finance Minister and then Minister of Environment, Energy and Climate Change, in the government of Prime Minister George Papandreou from 2009 to 2012. He faced what he calls a “disconnect” between the demands from European ministers that the Greek government close the fiscal deficit and the realization at home what the abrupt change in the government’s fiscal position meant for the economy. There was a continuous refusal on both sides to address the reality of the situation and to temporize in the unfounded hope that the arrival of another day would deliver a solution—or at least delay any decision that would generate voter unhappiness, either at home or in the European electorate. But postponement only raised the cost of what became three bailout agreements. Among the lessons that Papaconstantinou draws: “time is expensive: the more you delay, the more you pay.”
The IMF was also facing challenges in its involvement in the crisis negotiations, as Paul Blustein recounts in Laid Low. The Fund joined the European Central Bank and the European Commission, representing the European Union, in an arrangement known as the “troika.” The IMF, however, was viewed as a “junior partner,” and had to negotiate with its partners as well as with the Greek government. This was a departure from past practice, and placed the IMF in the position of making compromises that it came to regret.
The principal violation of the Fund’s own practices took place early in the crisis when it approved “exceptional access” credit to Greece, i.e., an unusually large amount of credit. Such approval was supposed to be contingent on a high probability that the debt was sustainable. This condition had clearly not been met in 2010, but the IMF gave itself a loophole when it approved exceptional credit if there is a high risk of international systemic spillovers. The insertion of the systemic exception clause violated any notion of the IMF’s evenhandedness when dealing with members who required assistance, and reinforced the image of the Fund as an agency dominated by its richer members.
The IMF subsequently has sought to recover its reputation as an institution that has extensive experience in macro adjustment and is willing to “speak truth to power.” It eliminated the exceptional access provision in 2016. The Fund now admits that the fiscal policies imposed on Greece in the earlier bailout programs were contractionary. And in a statement it issued on Tuesday, the IMF called for more debt relief by the European creditor governments:
“Most Directors considered that, despite Greece’s enormous sacrifices and European partners’ generous support, further relief may well be required to restore debt sustainability.”
But in a highly unusual public statement, the IMF also announced that the Board was split on the feasibility of the new agreement:
“Most Directors agreed that Greece does not require further fiscal consolidation at this time, given the impressive adjustment to date which is expected to bring the medium-term primary fiscal surplus to around 1½ percent of GDP, while some Directors favored a surplus of 3½ percent of GDP by 2018.”
Could there be a better outcome? Joseph Stiglitz of Columbia University argues that the monetary union is inherently flawed in The Euro. He points out that the euro was justified on the premise that a single currency would facilitate trade and financial flows, and “…the resulting economic integration would improve societal welfare everywhere within the Eurozone.” In fact, there were winners and losers, and the latter were not compensated for their losses. Such a redistribution requires political integration, which does not automatically follow the establishment of economic integration.
Stiglitz does not want to abandon what he calls the “European project,” and offers several structural reforms to rescue the euro. But all of these require political resolution as well intellectual flexibility, and these are not qualities rewarded by voters. Upcoming elections in France and Germany will show whether their citizens approve of the attempts to maintain the viability of the euro. If they follow the examples of the U.S. and British electorates, then the days of the euro may be numbered.