A splash of international espionage entered the Greek saga on Saturday when WikiLeaks published the conversations of high-level International Monetary Fund officials involved in the negotiations over the first review of the third bailout program.
It is clear that the three stakeholders – that is the European creditors, the International Monetary Fund and the Greek government – have different political incentives and do not share the same views about the future course of the economy. Therefore, someone has to give in. Either the IMF exits the Greek program or the Eurogroup accepts the IMF’s position for substantial debt relief and a much lower primary budget surplus from 2018 onward.
We argued in the last few weeks that the European lenders would like to conclude the first review well before the referendum on Britain’s future in the European Union on June 23. EU officials suggested last week that negotiations over the Greek review would freeze in June if there were no agreement by the end of May. Apparently, the IMF officials, whose conference call was tapped on March 19, were right on that. Of course, the EU may be exaggerating if one believes some British who say the Greek negotiations will play no role in their referendum. This is because it is widely accepted in Britain that the Greek economy cannot be meaningfully reformed, they add.
In any case, it would definitely be better for the first evaluation of the program to finish soon, but this should not come at the expense of measures that hurt the economy’s capacity to grow in the medium to long term. And this is exactly what the barrage of taxes and social security contributions, which seem to have the blessing of the European lenders, would do. Things would be much simpler if the IMF and the European Commission agreed on reasonable fiscal targets and the means to achieve them.
It would be better to lower the fiscal targets of the Greek program so that a smaller, more comprehensive package of austerity measures were required rather than insist on high targets and compromise on the restrictive measures, pretending they will suffice, as the Commission does.
We do not think any expert who knows how the local economy functions would ever agree Greece could attain a primary budget surplus equal to 3.5 percent of gross domestic product for several years in a row under reasonable medium-term growth assumptions in the country and abroad. Still, this is what the last Debt Sustainability Analysis (DSA) does.
Of course, the lower fiscal targets imply a certain degree of debt relief that some eurozone member-states are hesitant to provide, for political and other reasons at this point. For example, some countries are poorer than Greece. Moreover, it is a bit rich for the IMF to ask others to do something like debt reprofiling but exempt its own loans. The situation is complicated further by other factors, such as moral hazard, and the unwillingness of the Greek side to assume the ownership of the program, barring tax hikes and other revenue-enhancing measures.
Under the circumstances, there are three possible ways forward. First, continue on the same muddling-through path with the IMF in an advisory role. Obviously, the Fund has to compromise its positions. Second, the European lenders show the IMF the exit and assume the responsibility for the Greek program, sticking to the targets, accepting a milder austerity package and providing a politically acceptable version of debt relief. However, this may face political resistance in Germany and other countries. Third, the European Commission, the European Central Bank and the European Stability Mechanism accept the IMF’s action plan. In this case, the primary surplus target should be lowered and generous debt relief should be provided.
Undoubtedly, the three stakeholders in the Greek program have different political incentives. This makes a reasonable solution more difficult to reach. On the three possible ways forward outlined above, it seems the muddling-through approach would be the least productive but politics could continue to make it the dominant one. The remaining two approaches would face bigger political hurdles but could work better for all parties involved.
Albert Einstein said once, without caring about Big Brother listening, that we cannot solve problems by using the same kind of thinking we used when we created them. It is high time all three stakeholders in the Greek bailout program followed his advice. Either wave goodbye to the IMF or accept its position on the fiscal targets and debt relief.
[Kathimerini English Edition]