Greece’s third bailout is about to end. Can the eurozone claim success? Has Greece now exited the crisis? Kevin Featherstone suggests a ‘no’ to both propositions.
On Monday 20 August, the third Greek bailout will finish. The Greek economy has returned to growth with a 1.4 percent increase in GDP last year, an expected 1.9 percent this year, and a forecast 2.3 percent next year. So, is the Greek crisis over? Is this a eurozone success story? In reality, the picture is far from rosy and the Greek case poses lingering questions for the future governance of the eurozone.
That no fourth bailout is planned for Greece must be very welcome in Berlin, Brussels, and other EU capitals. The Eurogroup of finance ministers decided on 21 June that Greece had fulfilled its previous obligations and it agreed a new set of measures for the future. The latter allowed the Greek Prime Minister, Alexis Tsipras, to claim that his government had achieved a ‘clean break’ from the tutelage of the bailouts. After the meeting, Eurogroup President Mário Centeno announced, “We have managed to deliver a soft landing of this long and difficult adjustment”. Indeed, the group statement issued afterwards argued that “Greece is leaving the financial assistance programme with a stronger economy building on the fiscal and structural reforms implemented”.
All reasonable assumptions make the return of a Greek government debt crisis unlikely for the foreseeable future. The eurozone group agreed a long-delayed debt relief deal that leaves Greece with very low repayments until after 2030. This, in itself, should encourage market investors to buy Greek bonds. The weaknesses of the Greek banks and the high proportion of non-performing loans are a separate but probably manageable risk.
With that exception, EU leaders have sent the Greek problem away. There ought to be no more Brussels meetings of fraught confrontations with Greek leaders. In that sense, Angela Merkel and other European leaders can wipe their hands and move on—job done.
Yet look more deeply and the situation is more concerning. June’s deal involves some important restrictions. Exceptionally, future Greek governments are to be kept to maintaining a primary government surplus equivalent to 3.5 percent of GDP up to 2022 and then 2.2 percent until 2060. This is a tough stricture coming out of a recession; Greece’s partners could have allowed the country a bigger post-crisis ‘success’. It isn’t a rule that Germany followed in rescuing the German Democratic Republic at the time of unification, nor one applied now to other EU governments. The domestic consequences for Greece are far-reaching. It curtails government choices—democracy is hidebound—and it limits the scope for growth-inducing investment. This is reinforced by a second stipulation: that uniquely, Greece will be subject to visits for quarterly monitoring by EU officials to ensure it is keeping faith with its June commitments.
In the ten years before the crisis, from 1998 to 2007, Greece’s GDP grew 4.0 percent per year on average, driven by strong domestic demand. That consumption-led growth will not be replicated. In its ‘Economic Survey of Greece 2018’, the OECD forecasts that it will not be until after 2030 that Greece will return to the GDP levels it had before the onset of the crisis. In parallel, its government debt levels will continue to be above those of 2009 until well beyond 2060. The economic pain has been high: corporate bankruptcies in Greece in 2017 were five times higher than before the crisis—a level well above those found in the rest of southern Europe and one of the highest in Europe. Socially, unemployment rocketed, some 300,000 joined a brain-drain out of Greece, and the OECD reported the ‘severe material deprivation rate’ in Greece to be three times higher than the EU average.
So, while Greece may be out of the world headlines, the ‘success’ of its rescue is open to question. More pain is imminent with further pension cuts in January 2019 and the removal of an income tax discount in 2020, altogether saving some €5 billion. The OECD and the EU have lavished praise on the reforms recent Greek governments have adopted—opening up protected markets, improving tax compliance, revising corporate law, etc.—but they both identify that further progress is needed. Their high priority reforms for the coming years are in even more politically sensitive areas. Among these are reforms to public administration and financial management; the judiciary; and anti-corruption measures.
The openness of the court system to new legal challenges and the delays in it resolving them are legendary. On average, it takes almost 4.5 years for contracts to be enforced via the courts—more than twice the EU average.
Similarly, the dysfunctionalities within the public administration are deep and difficult to overcome. Practically every election in Greece from 1989 up to the crisis was marked by calls for the reform of the government administration. This has been in the name of ‘catharsis’, ‘modernisation’, and the ‘re-foundation’ of the state. The message has been consistent: Greece needs to improve service delivery, upgrade skills, and fight corruption and patronage. Alexis Tsipras led the radical left party Syriza to power in 2015 raging against the ‘kleptocracy’ of the old political elites and vowing to end party favours in public sector appointments. Yet, ‘jobs for the boys’ has continued.
Both the courts and the public administration have political muscle to exert when it comes to their reform. The main civil service union, ADEDY, is a powerful opponent to take on, especially for Syriza, which has courted its members.
The eurozone is right to prioritise institutional reform in Greece in order to improve the delivery of key services that impact the economy. Yet, these are reforms that countless Greek governments have spoken of and have largely failed to deliver. They are unlikely to be realised without substantive external help.
Part of this past June’s package for Greece was an agreement between the EU Commission and Athens for a new ‘Cooperation and Support Plan’. This is a framework for the continued provision of technical assistance to support reform implementation in the coming years. It will be badly needed.
But how far future Greek governments can be kept to this reform commitment remains open to question. Might financial help be withdrawn if Athens fails to institute performance-related pay, regulatory impact assessments, or resource reallocations? Would the eurozone provoke a crisis over such an agenda? Indeed, it is unclear how ‘hands-on’ its future surveillance of Greece will be and how far it may be willing to re-exert the pressure. Previous bailouts have had a patchy record: both the IMF and the European Court of Auditors have criticised their priorities and support.
The Greek case shows that stabilising the eurozone is not simply a matter of financing. Rather, the structural reforms recommended for its weaker member states raise a whole new agenda of how Europe can overcome the domestic institutional weaknesses inhibiting their implementation. A discourse that recognises that stability means further integration must also identify how to facilitate—and, indeed, make publicly acceptable—EU intervention to strengthen national public administrations, the courts, regulatory authorities, and the rest. The EU Commission’s recent tussles with Warsaw and Prague, both outside the eurozone, indicate the political controversies this might unleash.
Greece’s exit from the bailouts should not mask the problems bequeathed. EU leaders will consider it a ‘success’ that the Greek crisis has been returned ‘home’ to Athens and off their own TV screens. But this ‘success’ has to be measured alongside the tight squeeze on Greece’s economic recovery imposed by the new financing measures and the risk that deeper domestic institutional reforms may be swept under the carpet. The eurozone can ill afford the latter, as Greece is just one case among many where inefficient domestic institutions stymie EU convergence.
The EU would be wise to regard the ‘success’ of its Greek bailouts as being incomplete, while Greeks will no doubt shudder to imagine what their failure might have looked like.
Kevin Featherstone is Eleftherios Venizelos Professor of Contemporary Greek Studies and Professor of European Politics in the European Institute at the LSE. He is Co-Chair of the Dahrendorf Forum Working Group on “The Future Of European Governance“.
Photo by Αλέξης Τσίπρας Πρωθυπουργός της Ελλάδας via creative commons (CC BY-SA 2.0).