ECONOMY

Greece expected to get some breathing room

greece-expected-to-get-some-breathing-room

Europe has to grant Greece some fiscal flexibility as the crisis-hit country struggles to deal with both the coronavirus outbreak and the migration crisis, leading economists agree in comments made to Kathimerini. The government expects some good news in this direction next week, but will not be pushing for it.

Eurogroup chief Mario Centeno said last week that the European Union's Stability Pact allows for flexibility in cases of such unusual incidents that are beyond the control of governments, with the matter set to be discussed at the March 16 meeting of eurozone finance ministers.

Athens is expecting some leeway to handle the twin crisis without being suffocated by the tight limitations of a primary budget surplus target of 3.5 percent of gross domestic product, as the negative developments of the last month are threatening to derail the administration's rebound narrative.

The additional fiscal space is being sought within the context of EU rules, as the government does not want to appear as though its is trying to dodge its commitments and hopes to avoid provoking any negative comments or reactions. On the other hand, government sources tell Kathimerini that Athens will not strangle the economy with its own hands by taking additional austerity measures if it looks like targets are going to be missed as a result of spending on the virus and migration crises.

Besides Centeno's comments, Friday's Eurogroup Working Group (EWG) appeared to be sympathetic to Greece's predicament, according to sources. They said that it was noted during the meeting that Greece is trying to achieve the 3.5 percent primary surplus target despite increased risks from the coronavirus, given that its economy is highly dependent on tourism and shipping –wo sectors severely hit by the epidemic. The general spirit of the discussion, said a source that took part at the meeting, was that if there is a coordinated set of measures, Greece will not be excluded just so that it can make its 3.5 percent target.

According to Berenberg Bank Chief Economist Holger Schmieding, Athens should expect three things to happen. "First, Greece will be given significant European support to deal with the migrant crisis. Second, the EU will take virus-related damage and Greece's direct expenses to deal with the migrant crisis into account upon judging Greece's fiscal performance. Third, as many eurozone members adopt some –ostly national –iscal stimulus, Greece will also be allowed to pass some stimulus that supports the economy," he tells Kathimerini.

"Greece may want to consider corporate tax cuts, specific support for the struggling tourism sector or relief for workers hit hard by the virus impact. Like other countries, Greece would do well to study the German scheme (Kurzarbeitergeld) for temporarily subsidizing underemployment on the job," he adds.

Greece's creditors are likely to show significant fiscal flexibility toward Greece, according to Raffaella Tenconi, founder of ADA Economics and economist at WOOD&Co. "Greece is very likely to benefit from some adjustment in the fiscal goals if it asks for it, as a result of the migration and coronavirus outbreak." She does point out, however, that "for the time being we don't have a coherent European strategy for either problem and history suggests the response from Europe will prove inadequate and short-term."

The expansion of the coronavirus crisis in Europe may lead to some loosening of the fiscal rules and could prompt coordinated financial action in the European Union, says Wolfango Piccoli, co-president of Teneo. "The possible worsening of the Covid-19 crisis in Europe is likely to lead to some sort of fiscal flexibility and may be an EU-coordinated fiscal stimulus. However, it is not that simple. As usual, the European Central Bank is on the hook to deliver the first policy response. It is unclear whether the ECB has the tools and the room for maneuver to effectively improve the eurozone's economic outlook. A possible recession will be hard to contain given the twin demand/supply shock created by Covid-19. The usual economic tools –ncluding fiscal stimulus –re not that suitable to tackle such a rare challenge or shock," he warns.

Mujtaba Rahman, managing director at the Eurasia Group, agrees that "the coronavirus is leading to a general context where euro area members are likely to be granted additional fiscal space. The fact that Greece is on the frontline on migration reinforces the likelihood it will be one of the beneficiaries."

Indeed, Friday's EWG also showed understanding about the unfortunate timing of the new migration crisis coinciding with the appearance of the coronavirus for Greece. The government has already asked for expenditures for managing the refugee/migration crisis to be exempted from the calculations of the post-bailout program's primary surplus, a move that would allow some fiscal leeway of 280 million euros. In this sense, the migration issue is a serious argument in favor of a more flexible handling of Greece's finances.

However, that may not be sufficient for Greece to tackle the actual problem, says Piccoli. "As for the refugee crisis, lots of empty words and some money are the only things that the EU can provide Greece with to deal with the emergency," he tells Kathimerini.

It remains to be seen whether the finance ministers' good intentions will lead to actual measures. True, the rules set very specific conditions, such as that any expenditure to be exempted from the primary surplus calculation will have to be directly linked to an unusual and temporary incident. It is also uncertain whether some ministers will be willing to take the extra step needed to ease the pressure on the eurozone, and Greece in particular.