Why Greece is back in crisis mode

Published in Business Spectator (Melbourne), 11 February 2016

greece-broken euroAdmittedly, Europe’s migration crisis is far more interesting and important, but we have to talk about Greece again.

Amid all other crises plaguing Europe at the moment, the financial problems engulfing Athens had temporarily slipped off the front pages. However, it was only a matter of time until they resurfaced. That is because the last Greek bailout package, already the third of its kind, was never going to work.

In August last year, I wrote in this column: “In all likelihood, this new bailout package for Greece will not be the last. In 2018 at the latest (if the funds even last that long, that is) we will be back to where we are now, and have the same discussions about Greece’s future — and about a fourth and final bailout package.” (The third Greek bailout package is destined to fail, August 20 2015)

If only I could predict the lotto number as well as Greece’s future, I would have already become a millionaire.

It was obvious why Greece would not be third time lucky with its bailout. There simply was not enough genuine commitment to reform within the Greek government. The ruling Syriza party’s majority was too thin to implement tough measures in any case. Besides, the scheduled proceeds from asset privatisation were just wishful thinking.

Apart from these technical reasons, there was a more fundamental problem with the third Greek bailout. Like its predecessors, it was not suited to get the Greek economy back to growth. No matter how you handle Greece’s financial obligations, it will not change the competitiveness of its economy.

It is an argument that readers of this column will be familiar with. What Greece is really struggling with is its balance-of-payments position as well as its uncompetitive economy (and these are really two sides of the same coin). Greece’s fiscal position, unfortunate as it is, was always more a symptom than the cause of its troubles.

Harping on about this basic insight, I sometimes felt a bit like a broken record, but to me this is the crucial point for understanding the euro crisis. It is why, for example, I wrote in 2010 that “the most important challenge for the European periphery is not fiscal consolidation but restoring their competitiveness” (Grave euro doubts remain, August 19 2010).

There were, of course, a few economists over the past years who argued similarly. However, the mainstream of the profession, and certainly the majority of decision-makers, kept pretending that it was all about Greece’s debt.

So it was refreshing to read an interview with the IMF’s former chief economist Olivier Blanchard in London’s Daily Telegraph last weekend. Blanchard, who departed the IMF a couple of weeks ago, spelt out the problems in the eurozone with remarkable clarity.

“Fiscal transfers will help you go through the tough spot, but at the same time, it will decrease the urge to do the required competitiveness adjustment,” he told the Telegraph. Though still arguing for fiscal union, Blanchard was clear that such integration would not make the “euro function smoothly even in the best of cases”.

Looking at Greece these days, one can see why Blanchard is right. Over the past years, Greece received more fiscal support than any other country before, including from Blanchard’s former employer. It also enjoyed a partial relief of its debt. And of course, it also enjoyed the support of the European Central Bank, without which Greece’s banking system would have collapsed ages ago.

Yet none of these measures have fundamentally restored Greece’s economy, so the country was forced to go back to its creditors time and time again to ask for more money. Each time, the creditors would ask for further reform. In doing so, they ignored the fact that previous reforms had never been delivered fully and that even if they had been, they would not have solved the problem.

And this is where we are with Greece at the moment. Since agreeing to the third bailout package, the Greek government has not managed to tackle much of the agreed reforms. Some observers estimate that less than 20 per cent of last year’s reform promises have been implemented.

Reforming Greece’s public pension system appears to be a herculean task. Greece spends more on pensions as a proportion of GDP than any other EU member. Yet curtailing the system seems impossible. There are too many groups able to stage protests against any reforms. Already, Prime Minister Tsipras is considering another parliamentary election to deal with the political impasse. It would be the fourth time in a year and a half that the Greeks would have been called to the polls (three elections and one referendum).

Ironically, Greece’s saving grace for now may be the other crisis Europe is dealing with: immigration. Since most refugees currently pass through Greece on their way to more affluent European economies in the north, the rest of Europe has no interest in turning Greece into a failed state by taking it off life-support. Greece is still needed to restore protection to the EU’s external border which, at present, it does not protect properly.

For Greek Prime Minister Tsipras, the refugee crisis means not only that Europe’s attention is off Greece’s crisis, it also means that other European countries might be more lenient with his country. Without the migrant issue, we would now be back in Greek crisis mode.

That we are not talking about Greece does not mean that Greece is doing fine; it means that we have been distracted by other things.

But mark my words: the Greek crisis is back. We are indeed headed for a fourth bailout package, a new haircut, or both.

With this prophetic gift, perhaps I should be heading to the next lotto shop now?

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