The Eurogroup may reach a conclusion on the Greek financing gap and debt sustainability measures on Monday but will not likely make it easier for the country to attract private investments and push for privatizations. Moreover, it looks as if a quasi-solution may contribute to political instability, making the coalition government look weak in the eyes of the public.
European Commission officials and others, most notably German government ministers, have been rightly criticizing successive Greek governments for delays and unwillingness to push for structural reforms seen critical to restoring international competitiveness and economic stability.
They have been much less willing to admit their own mistakes in pushing for the implementation of fiscal policies characterized by an overdose of austerity and the wrong mix at the beginning of the economic program. Their role in contributing to reform fatigue kicking in faster than expected should not be underestimated, as we have argued before.
Readers are reminded that the initial Greek economic adjustment program in May 2010 projected a decline in real GDP of 6.5 percent in 2010-11 but the actual decline turned out to be more than 11 percent. Unemployment exceeded 21 percent rather than 15 percent and real wages fell almost double the assumed decline of 7 percent.
In addition, the same officials have been making conflicting statements about the future of Greece in the eurozone, indicating a lack of policy clarity and commitment, increasing the cost of adjustment in terms of lost jobs and output. This is because the statements have sapped consumer and business confidence in the Greek economy’s ability to get out of the doldrums.
Unfortunately, the slow decision-making in the eurozone and differences between the International Monetary Fund and Germany over key points of a plan to bring down the projected Greek debt-to-GDP ratio to 120 percent in 2020 and also fill the financing gap in 2013 and 2014 showed up once again on November 20.
If pundits are right, a compromise solution between the IMF, European Commission and Germany on filling the financing gap and interventions to make the Greek debt sustainable in 2020 on paper will be reached at the Eurogroup meeting on Monday. This should allow for the disbursement of some 31.3 billion euros in loans in a relatively short period of time, but the disbursement schedule for the remaining 13 billion euros earmarked for 2012 is not yet clear.
It will be a Pyrrhic victory for the coalition government which made the two-year fiscal extension its priority after the general elections in mid-June. This is because in the eyes of a growing number of citizens, it took all prior actions and passed the necessary legislation in Parliament and even accepted creditors’ demands for front-loading the new austerity measures in 2013-14, despite being granted the extension, without even getting the minimum of overdue bailout loans in their entirety in return.
Disillusionment will set in more forcefully when people realize that the delayed disbursement of the loans will not have the kind of positive impact on the economy foreseen by government officials. This is more so because the markets and investors in general are smart enough to understand that any compromise solution agreed by the country’s international creditors on Monday will not likely be the final one in this saga.
This, in turn, means uncertainty over Greece’s position in the eurozone will persist, albeit reduced since the creditors take on more risk by extending more loans to the country, with many investors looking past the German general election in September next year for more clarity on the issue.
In this kind of environment, it will be very difficult to convince Greek and foreign entrepreneurs and companies to defy the high country risk and invest in Greece, barring some specific projects, despite an expected improvement in both the fiscal and external payments accounts. This is more so since a number of them, namely banks and funds, have sustained huge losses in their bond and stock holdings and are therefore unwilling to buy again or extend credit lines to others.
Apparently, this is not what Greece and the coalition government needs, as austerity is bound to bite even more in the next few months, with disposable incomes declining and unemployment on the rise. However, this is the message about Greece sent by the Eurogroup’s inconclusive meeting last week which was interrupted “to allow for further technical work” despite months of talks between the IMF and the others on the sustainability of Greek debt.
Kicking the can down the road has not been a good strategy for Greece or the eurozone. Despite encouraging statements to the contrary, recent events have reinforced the view that decision making in the eurozone remains slow and tackling important issues head-on is not a priority when politics take precedence.
In this case, the real losers will be the Greek people and the coalition government, since the Eurogroup meeting to be reconvened on Monday is not likely to come up with a final solution to the Greek debt issue. Unfortunately, the perpetuation of uncertainty will definitely discourage private investments and undermine domestic political stability while costing creditors more later.