Don’t believe the EU – Greece’s crisis is nowhere near over

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With Nemesis dodged, however ruinously, it has not taken too long for Hubris to reemerge from under the rubble.

“The Greek crisis ends here tonight,” declared the EU commissioner for Economic and Financial Affairs within minutes of the conclusion of the June meeting at which it was agreed that Greece would receive the final slice (€15 billion) of its third Eurozone bailout this August.

Even though Greece’s graduation from rehab had been sweetened by its Eurozone creditors extending the repayment date of almost €100 billion of debt (about a third of the total) by ten years, this claim of victory was both tasteless (youth unemployment currently stands at nearly 40 per cent) and premature. Greece will be left with a cash cushion of €24 billion, which should enable it to avoid having to approach the financial markets for around two years — a handy breathing space, to be sure, but one that is more likely to be a respite than the preamble to a cure.

The country’s GDP expanded by 1.35 per cent in 2017, after almost a decade of annual declines interrupted only by the annus mirabilis of 2014, the one year when it eked out a positive return, a miserly 0.74 per cent. The IMF reckons that the pace will pick up to 2 per cent in 2018 and 2.4 per cent in 2019, which is at least something, if less than hoped earlier.

Perhaps that might happen — if the global economy keeps ticking over (and the neighbourhood remains calm: let’s not talk about Turkey and Italy) — but it’s impossible to miss the subtext lurking within the IMF’s recent report on Greece. Has a slump as deep as America’s Great Depression, but more prolonged, left behind enough of a country to make its own way? And will, as the IMF clearly worries, the continued policing of Greece’s finances by its reluctant rescuers be so severe that it shrinks the scale of a desperately needed recovery?

Formal exit from the bailout regime will mean an end to the harshest of the austerity measures that went with it, but Athens will still be required to maintain an annual “primary” (i.e. before debt servicing) budgetary surplus of 3.5 per cent until 2022. The straitjacket will then be loosened — somewhat. The government will be expected to achieve an average annual primary surplus of 2.2 per cent until, well, 2060.

Adding a culturally appropriate touch of Sisyphus to this already implausible undertaking (the IMF diplomatically talks of “very optimistic assumptions”), any new funding from the markets will be priced on far less generous terms than Greece’s rescuers have been charging.

And there’s no reason to be sanguine about that existing debt. It may be cheap and the timetable for its repayment leisurely, but its sheer size (some 180 per cent of GDP) means trouble ahead. After all, this is not a drachma-denominated liability that Greece once might have printed away. And it wouldn’t be a drachma-denominated liability even if Greece readopted the currency it should never have abandoned. A reborn drachma would plummet so far that the dream of repayment would quickly be replaced with the reality of default.

Brussels’ convenient conceit is that the EU’s new and improved Greece will grow out from under this burden, an unlikely prospect made more unlikely still by overly onerous budgetary constraints and the structural problems that should have made the country ineligible for the euro in the first place.

To start with, there is the matter of ensuring the economy can keep up with the rest of the Eurozone, not easy given the country’s persistently low productivity. Back in the days of the drachma, Greece could at least devalue its way into some approximation of competitiveness. With that option off the table, the conventional alternative, a domestic squeeze — an “internal devaluation”, to use the jargon — has been tried since the early stages of Greece’s long Calvary, and it is still being tried. But whatever its merits as a device to eliminate some of the worst aspects of the Augean state, there is scant evidence that it has done very much to sharpen the country’s competitiveness.

Indeed, in some respects it may have made things worse. Destruction can be creative, but sometimes it is just destructive. GDP stands at 2003 levels and at less than 60 per cent of its 2008 peak. Disposable income has fallen by about a third since 2010 and the private sector has been devastated. The banking sector is under-capitalised (credit is still contracting).

In short, so much has been smashed up that it is difficult to see where the type of turnaround Greece needs can come from. Three hundred thousand Greeks, including many of the nation’s best and the brightest, have emigrated in the last eight years, a move made easier by their right to settle anywhere within the EU. How many will come home?

A similar question can be asked about capital, which also moves freely throughout the EU and, as between the different countries of the Eurozone, with (the danger of eurogeddon apart) no currency risk: A French euro is a Finnish euro is a Greek euro. If a euro invested in Greece cannot offer the returns available from a euro invested elsewhere in the Eurozone, the country will struggle to attract investment, whether domestically or from abroad.

Rather than promote the economic convergence of its constituent parts, a currency union could well have the opposite effect. Capital will tend to flow to its winners and away from its laggards, a process that could doom Greece to ever more peripheral status. This slide will be accelerated by the unwillingness of the Eurozone’s member-states to agree to supplement their monetary union with a fiscal union that would, as in the US, establish the automatic transfer of resources from richer to poorer states that operates as a brake on a currency union’s natural centripetal pull.    

The task of modernising the Greek economy is, to put it mildly, incomplete, and there must be some doubt as to how much further its government is prepared to go down that route. The authors of the IMF report refer politely to “reform fatigue”. “Political pressures,” it warns, “to roll back reforms may intensify ahead of the 2019 elections”. Indeed they may, not only because of the agony associated with these reforms (made even more painful by outcomes with a tendency to disappoint), but also because of the largely accurate perception that they have been imposed from outside.

A good number of the real culprits — most notably those who took Greece into a currency union for which it was not ready and then squandered the opportunity it might have represented— are home-grown, but that’s not how it appears to many voters. Under the circumstances, it will not be surprising if some politicians are tempted to suggest to them that Sisyphus should shrug.

But even if Greeks do vote to stay the course — and the best guess is that they will, if only, in many cases, because they fear the alternatives —  and even if Italy’s new government does not trigger a broader Eurozone fracas, economics will eventually reignite the Greek crisis and, probably, sooner rather than later.

One of the rare, if partial, concessions to reality in the arrangements negotiated in June was that the Eurozone’s leadership will take another look at Greece’s situation in 2032 (2032!) to see if further debt relief is required. Well, it will be — and quite some time before then, because, in the end, nothing has really changed. Greece will continue to pay a terrible price for membership in a currency union for which it was, is and will be completely unsuited, but is understandably terrified to leave.

Its creditors, meanwhile, particularly in the Eurozone’s richer north, are terrified about the damage a Grexit could do to a Eurozone built on unstable foundations that they don’t want to complete, demolish or remodel. And so, after a re-run of a drama that will be stale before it has begun, there will be a fourth Greek bailout – and that won’t change much either.