The new bailout package for Greece solves many urgent problems, but the medium- to long-term issues facing Greece remain. Plus, the deal itself could actually increase the long-run chances of a “Grexit” (as a Greek exit from the eurozone is dubbed).
As Dun and Bradstreet predicted in June, Eurozone governments and Greece found a last-minute compromise after tense negotiations in Brussels in the early hours of July 13, keeping Greece in the euro area for the time being.
In the short run, Greece accepted more austerity measures and agreed to further reforms in its legal and regulatory systems. In return, Greece will get an additional €86 billion over the next three years from its international creditors. This is Greece’s third bailout, after others in 2010 and 2012.
Recently the Greek government repaid maturing debt to private investors in Japan, the European Central Bank (ECB), and the International Monetary Fund (IMF), signaling that the worst is over for now and the risk of a Grexit risk has fallen. Meanwhile, the ECB is keeping the Greek banking sector alive with its Emergency Liquidity Assistance. Banks in Greece are open again, but capital controls are still in place and withdrawals are limited to €420 per week.
If all measures of the bailout package are eventually fully approved by the Greek parliament, the country’s financing needs will be covered for the next three years.
However, while the last-minute compromise resolved some short-term issues, the deal aggravated some longer-term problems.
As most of the international creditors fiercely opposed a haircut on Greek debt, the new bailout agreement raises serious concerns about the long-term sustainability of Greek government debt. Despite the austerity program, government debt in relation to GDP will rise to levels around 200% until 2017, according to IMF estimates.
Regardless of the long maturity of the loans and the low interest rates, such levels are unsustainable. Over the long run, a debt haircut may be the only realistic option (a position that is supported by the IMF). This, however, would increase public opposition in the creditor countries against keeping Greece in the eurozone.
Recent developments reveal a split among European countries on how to treat Greece. While countries like France and Italy wanted to keep Greece in the eurozone at any cost, smaller Eastern European members, the Netherlands, and — most vocally — Germany and Finland were prepared to let Greece go.
Although the German parliament approved the bailout, almost a fifth of Chancellor Angela Merkel’s parliamentary group voted against the deal. In Greece, the government was only able to pass the additional austerity measures by relying on the opposition parties. The implementation risks of the new measures are very high, and snap elections in Greece (the second this year) seem possible as the government is already postponing key votes in fear of losing support from more members of parliament.
The “Medicine” Hasn’t Worked (Yet?)
Most worrisome, the austerity measures in the new bailout deal are the same ones that failed to deliver noteworthy results in 2010-14. Unemployment stands at 26% (with youth unemployment exceeding 50%), and real GDP per capita has fallen by 25% since the crisis began in 2009.
It remains to be seen whether the Greek electorate is patient enough to wait for the beneficial effects of the reforms. If not, the Greek people have no democratic choice left in the current political spectrum as all major parties — bar the fascist Golden Dawn and the Communist Party — supported the third bailout package.
A shift to the radical edges of the political landscape could become a serious concern over the medium to long run if the big parties maintain their current stance and public opinion does not shift away from opposition to more austerity and reforms.
While the chances of a Grexit in the short run have come down substantially since the bailout compromise was brokered, Dun and Bradstreet still sees considerable risk of Greece leaving the eurozone over the medium run as the pain of more austerity could become unbearable. With Germany and other states unwilling to make any noteworthy concessions, a Grexit might become the more desirable option for both sides in the next few years.
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.