Alfred Kammer, director of the European Department at the International Monetary Fund, is calling on Greece to redouble its reform efforts to face the double challenge of the legacy of the austerity programs and the coronavirus pandemic. He is careful to note that the necessary reforms include the increased funding of well-targeted social protection.
The German successor, since last August, to Poul Thomsen, talks to Kathimerini and repeats the warnings in the IMF’s recent report on Greece not to withdraw fiscal support measures prematurely, in order to prevent permanent damage in the form of high unemployment and poverty. He adds, however, that “once the recovery is firmly entrenched, high-debt countries will need to embark on a gradual, but sustained, consolidation path.”
Kammer supports a continued accommodating monetary policy on the part of the European Central Bank and a reformed Stability and Growth Pact. He raises the alarm on banks, saying that a comprehensive strategy is urgently needed. He proposes adding to the mix the Bank of Greece’s proposal to establish an asset management company (a bad bank) to deal with nonperforming loans.
Kammer also speaks candidly about the lessons learned by the IMF from the Greek financial crisis and the successes and failures of the austerity programs.
Do you think the European Union’s response to the Covid-19 crisis – namely the Next Generation EU program – is satisfactory?
Yes, the €750 billion EU recovery package could provide a meaningful boost to the recovery if countries spend the money on high-quality investments and programs. Importantly, €390 billion, nearly 3% of EU GDP, is in the form of grants, and countries hard hit by the crisis and those with lower income levels will especially benefit from these grants. Moreover, the majority of the EU recovery funds will be aimed at addressing climate change and investing in digitalization. Finally, the recovery fund is designed to give countries incentives to implement reforms to tackle longstanding structural impediments to growth. If vigorously implemented, these reforms could amplify the medium-term growth impact of the recovery package.
How long do you think the ECB should continue to do “whatever it takes”?
Headline and core inflation are projected to bottom out early next year as temporary factors dissipate. However, inflation is set to remain well below the ECB medium-term aim of “below, but close to 2 percent” for a prolonged period owing to persistent weak demand and sizable slack in the labor markets. This suggests that a sustained monetary policy accommodation will be needed to support the recovery and counter the pandemic disinflationary pressures, and we welcome the ECB’s commitment to adjust its policy instruments as needed to ensure that its medium-term inflation aim is met.
Has the second wave of the pandemic added new threats? How should the governments react?
The second wave of the virus poses a considerable risk to the recovery as rising infections and re-imposed lockdowns have damaged confidence and lowered mobility. This suggests that the better-than-expected growth outturn in the third quarter of 2020 will likely be followed by weak activity in the fourth quarter of 2020 and early 2021, thus delaying economic recovery. While the positive news about the vaccine gives us some assurance, there is still significant uncertainty regarding the speed of vaccine distribution and when herd immunity can be achieved. With the resurgence of the pandemic, national fiscal policies should continue to provide the first line of defense as a premature withdrawal of fiscal support could derail the recovery. However, as a recovery gradually takes hold and the pandemic abates, governments should focus on facilitating reallocation of labor and capital toward sectors and businesses that will likely be viable post pandemic, as well as on sustainably boosting inclusive growth and reducing fiscal vulnerabilities. Should the outlook materially deteriorate further, additional broad-based fiscal stimulus will be needed. Full use of EU financing and continued low sovereign borrowing costs will help ensure that high-debt countries can sustainably maintain the needed fiscal support during the recovery. However, once the recovery is firmly entrenched, high-debt countries will need to embark on a gradual, but sustained, consolidation path.
When should the EU deactivate the general escape clause? Should it return to these rules, or reconsider the Stability and Growth Pact?
We fully support the decision to activate the escape clause. Countries need to bring to bear the necessary fiscal resources to address the current crisis. The recovery needs to be firmly entrenched before the escape clause is deactivated. Reimposing the normal operation of the rules too soon could cause a premature withdrawal of fiscal support and derail the recovery. Furthermore, as we’ve long argued, the current set of fiscal rules is overly complex and should be reformed. This has become even more urgent considering the fiscal response to the Covid-19 crisis and the rise in debt levels. Now this could be an opportune time to reform the rules, while the escape clause is activated. The Commission is undertaking a review of the fiscal rules, and European leaders could task the Commission with making a proposal to reform the fiscal rules as part of this review.
Will the Greek economy survive a second crisis?
Strong policy action by the government has helped to support lives and livelihoods, but the human and economic costs of Covid-19 remain substantial. Our recent staff report for Greece’s Second Post-Program Monitoring discussions projects a contraction by 9.5% for 2020, followed by a rebound of around 5.7% during 2021 and 2022. Since then we have observed an accelerating number of Covid-19 cases in Greece and in key trading partners. While the second lockdown would likely delay the anticipated recovery, the government’s decision to provide further support to workers, households and firms is very welcome and will limit the impact of the second wave. Also, faster developments on the vaccine front and hopefully its swift mass distribution in Greece and the region could substantially boost the outlook, particularly for Greece, where tourists tend to arrive in the summer.
Where did the the memoranda – and the IMF – go wrong and what was their positive contribution to the Greek economy?
I will echo here what our managing director said during an interview with your newspaper a few months ago. We have published several evaluations of our assistance during this period. While the 2010-18 crisis was traumatic, Greece remained in the euro area and spillover effects to the global economy were relatively well-contained. Upon completion of the programs, Greece emerged with solid growth, falling unemployment and renewed investor confidence amid improved fiscal management and some momentum behind efforts to clean up the banking sector. That said, Greece is still addressing crisis legacies and is now also faced with Covid-19 related challenges. Hence, reform efforts should be redoubled to lay the foundations for strong, sustainable and inclusive growth. This includes increasing funding for well-targeted social protection, particularly for healthcare for the most vulnerable. Strong social cohesion allowed Greece to cope well with the Covid-19 shock and hopefully this can be maintained to deal with its aftermath.
Did the IMF learn some lessons from the Greek crisis?
There have been several rigorous evaluations of the IMF’s assistance in the euro area, including by our Independent Evaluation Office. I draw the following four general lessons from these studies: First, domestic ownership, political stability and equitable sharing of burdens across different strata of society are essential to build broad support for the reforms. Too much of the burden of restoring competitiveness fell on workers through lower wages, while the delivery of product market, justice system and network industry reforms aimed at reducing the cost of living or of doing business fell short. These examples demonstrate the importance of proper sequencing of reforms and ensuring that reforms are not just agreed but implemented. Second, realism is key. In some areas, such as fiscal policy, Greece’s upfront amount of adjustment was ambitious by international standards. In others, such as cleaning up the banking sector, the approach was too tentative, which continues to hamper credit provision even today. Third, upfront commitments of debt relief to deliver debt sustainability are a prerequisite for program success in the circumstances like those that were faced by Greece. And finally, in the context of the eurozone, it is essential to establish strong collaboration with the various European institutions, regulators and supervisors.
Why does the IMF now suggest higher deficits for Greece, as per the second post-program report?
This is not new at all. For a long time, the IMF has called for lower fiscal targets in Greece and for escape clauses to ensure that temporary economic shocks are not exacerbated by fiscal consolidation. Thankfully, European policymakers delivered by suspending the fiscal rules under the Stability and Growth Pact as well as by relaxing the high primary surplus targets for Greece following the Covid-19 shock. We expect that it will take some time before Greece fully recovers from the Covid-19 shock. So, I would caution against a premature withdrawal of fiscal support to avoid creating lasting damage from the pandemic in terms of higher unemployment, poverty risks and lost income.
In this report you also highlight persisting weaknesses in banks. What should be done?
Greek banks entered the Covid-19 shock with limited buffers, the highest nonperforming exposures (NPE) ratio in the euro area, and weak quality of bank capital. The pandemic triggered a broad range of support measures which will cushion and delay the pandemic’s impact on banks, but it is likely that a fresh wave of impaired loans will emerge when this accommodation is phased out. As a result, a comprehensive strategy that deals with the new challenges and the longstanding weaknesses in the banking sector is urgently needed. While the provision of state guarantees on bank securitizations (project Hercules) is welcome, it is not a comprehensive solution, as it leaves a large amount of NPEs on bank balance sheets and the weak quality of bank capital unaddressed. In this context, the Bank of Greece’s proposal to establish an asset management company could be an important addition to the toolkit. But we would recommend a comprehensive cost-benefit analysis of the proposal that includes all stakeholders, including banks, the government, regulatory agencies and European partners. The pandemic also requires effective tools to resolve corporate and household debt distress. In this regard, the authorities’ new draft bankruptcy code is a promising and timely initiative, although effective implementation will be critical.
What should we expect from Greece’s next Debt Sustainability Analysis?
Greece’s Debt Sustainability Analysis (DSA) is unique given the high share of official financing with very long maturities that gradually needs to rotate in private hands. Making economic predictions for the next four decades is obviously very challenging and subject to considerable uncertainty, even more so at the current juncture. The next long-term DSA will be discussed during the Article IV mission in the spring. The team will look closely at the long-term growth potential of the Greek economy in a context of ongoing reforms that aim to close its investment gap and recent developments in the labor market. We will also need to weigh potential long-term scarring effects from the pandemic versus the possible boost to growth if good use is made of the European recovery grants and possibly loans. Interest rates on Greek government debt are a second important ingredient in the DSA. There is a debate among policymakers and academics whether interest rates will be “lower for longer” and we will need to reassess what this means for Greece’s bond spreads. Finally, we need to reflect on what constitutes a sustainable fiscal primary surplus for Greece, which depends to some extent on the fiscal framework and rules in the EU once the pandemic is behind us.
To which reforms would you give priority in Greece now, for a sustainable recovery?
The authorities’ efforts to advance structural reforms during the pandemic are commendable. The goals and ambition of the new National Growth Strategy could boost productivity and promote innovation when European funding becomes available. We fully support the government’s push to improve the business climate, accelerate digitalization, and rebalance the production model toward green and export-led growth. The authorities are rightly placing labor market flexibility and modernization as legislative priorities. Once adopted, policies should be swiftly implemented and the government should start resolving rigidities in the labor market, particularly skills mismatches and the high level of youth and long-term unemployment. Additional reforms include facilitating female labor participation, raising healthcare spending, and addressing coverage gaps in the Social Solidarity Income scheme.