Greece can choose its government, but not its economic policy

Brussels – Responding to a question from SYRIZA MP, Nadia Valavani, during a conference in Lithuania, last week, European Economic and Monetary Affairs Commissioner, Olli Rehn, confirmed that Greece’s fiscal monitoring would not end when its bailout expires, regardless of whether that is next summer, or if a third package is needed.

Valavani issued a press release, detailing Mr. Rehn’s answer, only yesterday. The whole issue immediately became a “breaking news item” on most Greek websites. Viewers and readers seemed surprised.

However, in its Greek edition, Kathimerini has reported at least seven times, over the last six months, that even if Greece exits its eurozone/IMF backed macroeconomic adjustment program, regains market access, and elects a different, “progressive” government, it will still not be able to follow an expansionary fiscal policy. This is because, following the outbreak of the crisis, all eurozone governments (including the Greek one) have bound their countries to follow a “Spartan” economic policy indefinitely, through a set of draconian pieces of legislation.

Of course, nothing is irrevocable in politics, but if a potential SYRIZA government wants to implement “Keynesian” policies – even assuming markets were willing to finance the deficits created by such policies – it would either have to convince all of its eurozone partners to agree on changing the current legislative framework, or leave the single currency.

Otherwise, if SYRIZA tries to diverge from Eurozone’s “economic orthodoxy”, then Greece will be taken to the European Court of Justice, asked to pay heavy fines, while even EU subsidies from the new Multiannual Financial Framework (2014-2020), will be suspended. From 2014 onwards, these subsidies (structural and regional funds) will be tied to macroeconomic conditionality “in order to ensure that their effectiveness is not undermined by unsound macroeconomic policies and that they can be redirected to address the economic challenges a country is facing”, as Rehn has said in February. Potential losses from EU funds will offset any theoretical gains from an expansionary fiscal policy.

Which are these pieces of legislation that tie Greece, and everyone else to perpetual fiscal discipline? First, the “Treaty on Stability, Coordination and Governance in the Economic and Monetary Union” (also known as the “fiscal compact”), which entered into force on 1 January 2013. The new treaty “requires the national budgets of participating member states to be in balance or in surplus. This goal will be deemed to have been met if their annual structural government deficit does not exceed 0.5 percent of nominal GDP. If a member state deviates from the balanced budget rule, an automatic correction mechanism will be triggered. The member state will have to correct the deviations over a defined period of time”. According to another piece of legislation (the so-called “six pack”), failure to comply will incur financial sanctions of up to 0.5 percent of GDP.

But failing to comply is basically impossible for Greece. This is because a eurozone-specific piece of legislation (the “two pack”), requires “member-states to submit their draft budgetary plan for the following year to the Commission and the Eurogroup before 15 October, along with the independent macro-economic forecast on which they are based. If the Commission assesses that the draft budgetary plan shows serious non-compliance with the aforementioned rules, the Commission can require a revised draft budgetary plan”.

Besides this, eurozone member-states, like Greece, which have sought financial assistance from the European Financial Stability Facility, will have the Commission standing over their finance ministers, until they repay most of these loans.

According to Article 14, of EU “Regulation No. 472/2013 of the European Parliament and of the Council of 21 May 2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability”, “a Member State shall be under post-programme surveillance as long as a minimum of 75 % of the financial assistance received from one or several other Member States, the EFSM, the ESM or the EFSF has not been repaid. The Council, on a proposal from the Commission, may extend the duration of the post-programme surveillance in the event of a persistent risk to the financial stability or fiscal sustainability of the Member State concerned. The proposal from the Commission shall be deemed to be adopted by the Council unless the Council decides, by a qualified majority, to reject it within 10 days of the Commission’s adoption thereof”.

What does this “post-programme surveillance” actually mean? That “the Commission shall conduct, in liaison with the ECB, regular review missions in the Member State under post-programme surveillance to assess its economic, fiscal and financial situation. Every six months, it shall communicate its assessment to the competent committee of the European Parliament, to the EFC and to the parliament of the Member State concerned and shall assess, in particular, whether corrective measures are needed”.

In Greece’s case, this means that the surveillance will be in place for at least another 25 years. Athens has so far received 133.04 billion euros from the European Financial Stability Facility (EFSF). The EFSF is due to pay out another 10.66 billion euros, until the summer of 2014. The average weighted maturity of the bonds is 30.48 years, but this could be extended next summer, in the context of Eurogroup’s decision of November 2012, to make Greece’s debt more manageable. Greece has also received 52.9 billion euros in bilateral loans from its eurozone partners. This will also have to be paid back as part of the process of exiting fiscal surveillance.

In short, if the next Greek government wants to follow a loose fiscal policy, and still keep the country in the eurozone, then we can only wish it “good luck”. It’s going to need it.

For More Information, see the actual legal texts:

– Regulation (EU) No 1173/2011 on the effective enforcement of budgetary surveillance in the euro area – sanctions regulation

– Directive 2011/85/EU on requirements for budgetary frameworks of the Member States

– Regulation (EU) No 473/2013 of the European Parliament and of the Council of 21 May 2013 on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area

– Regulation (EU) No 472/2013 of the European Parliament and of the Council of 21 May 2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability

– Treaty on Stability, Coordination and Governance (full text, pdf)