Institutions search for Greek balance


TAGS: Analysis, Economy, Finance

“Carrot and stick from the IMF” read one headline in Greece this week after the International Monetary Fund provided its forecasts for the Greek economy in its World Economic Outlook (WEO) and Fiscal Monitor reports. The Fund suggested that Greece could grow at a decent rate next year but raised doubts about whether it can reach its fiscal targets, leading the Washington-based organization to repeat its calls for the eurozone to grant Athens significant debt relief.

Perhaps, though, the IMF’s reading of the Greek economy’s immediate future did not have that much to do with carrot and stick but was more an accurate representation of the yin and yang involved; the contrasting forces that somehow have to become complimentary if Greece is to climb out of the hole it has sunk into.

According to the IMF’s latest estimates, the Greek economy is set to grow by 0.1 percent of gross domestic product this year. This is the most optimistic forecast that any of Greece’s lenders have made and is a substantial improvement on the 0.6 percent contraction the Fund had predicted in its last WEO. The IMF also edged up its growth forecast for next year. GDP is now seen growing by 2.8 percent, rather than 2.7.

Greece’s unemployment rate for 2016 is seen falling to 23.3 percent, rather than 25 percent previously. Next year, the jobless rate is expected to tumble to 21.5 percent from the 23.4 percent set out in the previous report.

However, when it comes to fiscal performance, the IMF struck a much more somber note. The Fund expects Greece to record a general government primary surplus of 0.1 percent of GDP in 2016 against a program target of 0.5 percent. Next year, the IMF sees the primary surplus reaching 0.7 percent of GDP, which is way off the target of 1.8 percent. The Washington-based organization believes that Greece’s primary surplus will remain at 1.5 to 1.6 percent after the current program expires in 2018. The program calls for a primary surplus of 3.5 percent of GDP from 2018 onwards.

The gaping discrepancy between the IMF’s forecasts for the primary surplus and what Greece’s eurozone lenders expect the country to produce is the crux of the matter. The Fund clearly believes the Greek economy has potential to grow and that the two main elements to achieving this are the implementation (at a minimum) of the structural reforms that have been agreed and debt relief. The IMF’s forecasts emphatically underline that its economists do not believe Greece can grow at a rate that would allow it to meet the primary surplus targets it has been set and, therefore, be in a position to meet its debt commitments.

“We have demonstrated flexibility in the past in order to assess debt sustainability,” said IMF Managing Director Christine Lagarde at the international body’s annual meetings in Washington last week. “We clearly believe that, as is, the debt is not sustainable.”

As the Fund has not so far committed to the third Greek program, and because there has been significant internal as well as external criticism of its role in the previous two, it is currently in a position where it feels the need to speak more freely than if it had to fall in line with the other institutions to ensure that Athens sticks to the letter of the agreement it has made with them.

The IMF’s European Department head, Poul Thomsen, pulled no punches in his assessment of where things stand when he spoke in Washington on Friday. “We can support a program that is based on a primary surplus of 1.5 percent. If Greece and its European partners want to agree on a program with a more ambitious fiscal target, we need to see how it adds up,” he said. “We do not think that the program that is on the table is consistent with more ambitious targets... over the medium term.”

Thomsen identified some measures that could help produce a larger surplus, such as reducing tax exemptions that the IMF believes are still far too high in Greece and reforming the pension system further, but he cast doubt on whether the goal of reforming the public sector could ever be achieved. The Fund does not seem convinced that at this stage there is a mix of measures that can produce the fiscal targets that the eurozone craves.

What the IMF is essentially saying is that regardless of how much the current, or any, Greek government does, within limited capabilities and to what extent the economy fulfills its growth potential, the distance that needs to be covered is so large that there is no way that Greece can reach the fiscal goals it has been set. It sees Greece as an 800-meter runner who has started closing in on the leading pack in the home straight but will never be able to catch up because the toll of having started the race 400 meters behind everyone else is catching up.

This is an interpretation that the eurozone does not want to hear at the moment. “Greece’s problem is not its debt but gaining competitiveness,” said German Finance Minister Wolfgang Schaeuble in Washington, underlining that Greece’s lenders are talking at cross-purposes at the moment.

For the time being Greece is simply hoping that this will all work itself out in the coming months. The draft 2017 national budget submitted to Parliament last Monday was a bit of a hit-and-hope move by the coalition. Although it foresees the economy contracting by 0.3 percent this year, it predicts 2.7 percent growth next year (in line with the European Commission’s forecast) that will be driven by a 1.8 percent increase in private consumption, an investment rise of 9.1 percent and 5.3 percent boost for exports.

The problem is, as the Finance Ministry states in the draft budget, that the turnaround is predicated upon the positive spillover from a return of confidence due to the implementation of the program. At this stage, though, it is still unclear whether the program will be executed smoothly. If the IMF does not join, for instance, there are doubts if the program will continue to exist. If it does continue, just with the eurozone’s backing, it will fail miserably if the IMF’s projections are correct. Then there is the possibility that even if Greece’s lenders do reach an agreement, Athens will find a way to foul things up.

For the moment, Greece and its creditors must focus on how to bring together the duality of demanding fiscal targets and strong growth. Finding a way in which these two can coexist happily will have a significant impact on Greece turning the corner and everyone involved finding peace of mind. The last few days suggest that there will be disharmony ahead before this point can be reached.