But the crisis is far from over even if a compromise between Greece and its creditors results in the release of the remaining €7.2 billion from the second bailout package and potentially another €10 billion that was earmarked to recapitalize Greek banks. The inevitable may just be postponed — again.
The Greek government urgently needs access to fresh liquidity in order to repay a loan to the International Monetary Fund (IMF) by June 30. If the deadline is missed, it could lead the European Central Bank (ECB) to withdraw its “emergency liquidity assistance’” for the ailing Greek banking sector, thereby leading to a collapse of the domestic banking sector.
Without any doubt, the current situation is serious and needs constant monitoring. However, even if a last-minute backroom deal is successfully negotiated by the two sides, Greece’s future in the eurozone will be at risk over the medium term for several reasons.
Too Little, Too Late
The disbursement of €7.2 billion from the last bailout package will not be enough to cover Greece’s refinancing needs for long. The Greek government needs to repay a total of €6.7 billion to the ECB on July 20 and August 20, with several other smaller payments to the IMF also on the horizon. The country is running a primary deficit again (roughly speaking, the country is spending more than it collects in taxes, even if interest rate payments on existing debt are excluded), making it very likely that further financial aid from the EU or the IMF is required.
Public Opinion Shifting Away from Greece
Public opinion in Berlin and also Brussels (the de facto seat of the EU) is changing. While a majority of the policy makers still want to keep Greece inside the eurozone, the public is losing patience with the Greek government.
Given the ongoing austerity measures in many eurozone member states and the rise of anti-EU parties in many countries (like the Front National in France or the Finns Party in Finland), a third rescue package for Greece is unlikely to be approved by national parliaments.
Situation in Greece Getting Worse
The medicine prescribed for Greece by the IMF, ECB, and the EU is not working. Even before the leftist Syriza party took office in January 2015, unemployment stood at almost 26% and real GDP had fallen by more than a quarter in the 2007-14 period. The standard of living in the country continues to deteriorate.
Almost one-third of Greece’s population is without health insurance now, something unthinkable in Europe. With the EU asking for more spending cuts and tax increases, it is unlikely that the Greek economy will grow robustly any time soon.
Against this backdrop, a last-minute deal would only feel like kicking the can down the road again. Over the medium term, the Greek government needs to decide if it can regain international competitiveness by internal devaluation (e.g., wage constraints and structural reforms) or if an exit from the euro area will be the easier option.
To be clear: A Grexit would not be the panacea for Greece’s structural problems. The country has the world’s 118th-most-competitive labor market out of 144 economies surveyed, according to the World Economic Forum’s Global Competitiveness Report 2014-15. The public sector remains oversized, while the tax collection system remains poor despite five years of spending cuts and tax increases.
A Grexit would bring considerable risks for the wider eurozone, and — worst-case scenario — it could lead to the complete breakup of the eurozone.
But given changes in public opinion in the EU and the unpopularity in Greece of further austerity measures, a Grexit could be the lesser of two evils. Or, according to a German proverb: “Better to have an end in pain, (instead of) a pain without any end.”
Having previously worked for the European Parliament in Brussels, Markus Kuger joined D&B’s office in Marlow/United Kingdom in June 2010. In his role as Senior Economist in D&B Macro Market/Country Insight Products, he is writing about his home country Germany as well as the UK, France, the Netherlands, and Poland.