Greece facing dual challenge
Delphi was always a good place to go to be forewarned of the challenges the future might hold. This year’s annual Delphi Economic Forum should have helped crystallize in Greek decision-makers’ minds the two main tests they will have to overcome going forward. The first is to negotiate the final stretch of the third program successfully. The second is to navigate the country on a safe and rewarding course once it exits the relative protection the bailouts have provided.
With the third review officially out of the way, attention is now on the fourth and final inspection by the institutions. The message given by European officials who spoke at Delphi earlier this month was that progress is being made but there are also a lot of pieces that need to fall into place in a very short time if the program is going to expire without any problems on August 18.
There are three key elements to achieving a successful exit: Completing the 88 prior actions, agreeing a debt relief package and settling on the post-program framework. Each has its own difficulties.
After holding at the end of February a first round of talks with Greek government officials in Athens, aimed at pinpointing the “key deliverables” that will prove most difficult to complete on time, the crediting institutions returned to their respective bases and are waiting for the coalition to make progress on the planned reforms.
The aim is for the creditors to return to Greece in early May to secure a staff-level agreement (SLA) in time for the Eurogroup later that month.
If the SLA is in place in May, the European lenders can then focus on settling the debt relief and post-MoU framework issues before the next Eurogroup in June, leaving ample time for the end of the third program in August.
The main challenges are the sheer volume of work that needs to be done to settle the 88 prior actions and the complexity of some of the reforms that need to be carried out. The recalculation of “objective” property values, used for tax purposes, and the appointment of senior civil servants are just two of the actions that have proved extremely time-consuming so far.
The Finance Ministry denied last week a report claiming that Greece and its lenders have considered extending the third program by four months to allow more time for the process to be completed. It is certain, though, that the government is under tremendous pressure to complete its tasks within a brief timeframe.
A parallel discussion is taking place between the creditors regarding the debt relief package. Technocrats are working on a French proposal to provide Greece with extra assistance if its economy underperforms in the future. Here, too, there are many details that need to be resolved, especially given the longstanding disagreement between the European lenders and the International Monetary Fund over what is needed to make Greece’s debt sustainable.
This issue also feeds into the discussion regarding the post-bailout framework, which revolves around whether a precautionary credit line will be needed or a cash buffer will suffice, what kind of surveillance will be adopted and whether debt relief will be linked to specific reforms.
Regardless of whether the IMF remains on board, this is a lot for the eurozone to agree on in the next couple of months. Its ability to fashion last-minute deals that prevent a hard stop being reached will be tested again.
If we assume that Greek officials go into overdrive in the coming weeks and the European lenders manage to create a debt relief and monitoring package that leaves everyone satisfied, then the next great challenge for Greece will have to be addressed. For the first time in just over eight years, the country will have to find a way to function, and prosper, outside of the programs.
This may prove a complex task as it will require vision, forward-thinking, progressive ideas and a determination not to return to the failed practices of the past.
If there was one message that could be heard louder than all the others at Delphi (not only from European officials, but also businesspeople, academics and experts) it was that Greece has to continue reforming after leaving the bailout.
“The issue is not whether Greece can successfully complete the program but whether it can achieve a sustainable recovery,” said Declan Costello, the head of the European Commission’s mission for Greece.
“Liberalizing the economy and creating a business-friendly environment must be a constant effort from now on,” said European Stability Mechanism (ESM) Managing Director Klaus Regling. “These are not issues that can be put in place once, and then be forgotten.”
He underlined that debt relief alone after the bailout exit would not be enough to sustain Greece. “What Greece needs in the first place is growth, continued reform and a business-friendly economy, with an efficient public administration,” he said.
The concern is that the Greek political system is not capable of delivering the required policies on its own and only delivered over the last eight years under the pressure of the creditors and the threat of an outright default and a catastrophic exit from the euro.
At the same time, though, the programs have reduced the decision-making period on which Greek politicians have focused to however long it took to get from one program review to the next (just under seven months on average).
The test for the current, and future, governments is to break this mould and deliver the further changes that are needed without reversing any of the advances made in previous years. “I’m not worried about policy reversal but implementation risk,” said Costello, adding that the next three to four years will be the most important for Greece.
These reservations, though, cannot justify Greece remaining under a program for much longer. All bailouts are designed to come to an end at some point and it has been a long and difficult eight years since the first memorandum of understanding (MoU) with the international creditors was signed. The time is approaching for Greece to show that it has learnt from what was, at times, a traumatic experience and that it is able to move on. More independence comes with increased responsibilities. Who is up for the challenge?