Greece’s bailout negotiations are over and a deal has been tentatively agreed but it’s fair to say we know that it will ultimately fail.
The agreement is pretty similar in structure to the one that Greece had in 2010, and the one that it had in 2012. Those agreements helped propel radical Syriza to power in January, but the will of the Greek people wasn’t enough to get a significantly improved offer from Europe. If the country wants to stay in the eurozone, this is all it’s getting.
It’s possible to break down the deal into three likely-insurmountable problems.
1. Greece has already tried and failed at many of these reforms before
The Greek programme of structural reforms is likely to be ludicrously optimistic.
For example, if the €50 billion (£35.14 billion, $US54.82 billion) figure floated by the creditors sounds familiar, that’s because you’ve heard it before. Here’s the beginning of an Economist article from July:
WITH a target of €50 billion ($US72 billion) by 2015, Greece’s privatisation plan aims to raise more cash as a share of GDP than any OECD government has managed before… Most privatisation programmes involve a trade-off between long-term structural reform and short-term fund-raising. In Greece’s case, there is an urgent need for money.
Not July this year. July 2011.
In reality, Greece raised closer t0 €5 billion (£3.51 billion, $US5.48 billion) in privatisation revenues, and that was hard enough politically. These reforms have helped to sink two governments, but the country is still uncompetitive compared to much of the rest of Europe:
Unpopular liberalisations, privatisations, and austerity are part of what has now devastated Greece’s two former mainstream political parties. Back in 2009, PASOK and New Democracy got more than three quarters of the vote between them. In polls now, they’re getting closer to one quarter.
The programme would require Syriza to be more successful than its predecessors in implementing the austerity and reform package, despite the fact that it is more ideologically opposed to both than any previous government.
US economist Tyler Cowen has suggested that Greece needs a “Thatcheropoulous”: a “strong, credible, pro-debt renegotiation, pro-capitalism, anti-corruption, pro-tax fairness, and pro-foreign investment” politician. But it doesn’t seem like there is one on offer.
2. There’s too much debt and not enough growth
The International Monetary Fund (IMF) conceded on Wednesday morning something that perhaps would have been useful to the Greek negotiating team a week or two age: The country’s debt is unsustainable.
That’s something a lot of people have said for a long time, but it’s new for the IMF. Before, Greece’s debt was judged to be just “highly vulnerable.”
There are two components to Greece’s debt problems. One, of course, is taking on too much debt.
But the other is the absolutely abysmal performance of Greece’s economy in the last five years — so any measure (like debt as a proportion of GDP) that uses the size of the economy as a benchmark will look worse.
There’s simply no real hope for a rapid turnaround here. Nominal GDP, a combination of inflation and real growth, has been sliding for five years. Europe’s inflation is very low, and Greece is actually seeing outright deflation. Since Athens is not in control of the euro, there’s no prospect of devaluing the currency either.
The reforms that Greece has taken on, like lifting restrictions on hiring and firing employees, may have been a good thing to do anyway. But they will take years to make a meaningful contribution to growth.
3. Surpluses are still painful, and the problems reinforce each other
Barry Eichengreen, one of the world’s most renowned economic historians, found in 2014 (when Greece’s economy at least looked like it might grow a little) that the country would need to run a primary surplus worth 7.2% of its GDP — that’s a government budget surplus before debt interest payments are accounted for, every year between 2020 and 2030. That would allow the country to reach the 60% debt to GDP ratio that it’s meant to be aiming for.
To achieve such a reduction over the same period, that figure would now be even higher given that the economy is almost certainly back in recession. As the IMF conceded on Wednesday morning, debt levels have spiralled even higher. Eichengreen looked at 54 countries over 40 years and found only three that had run surpluses worth more than 5% of GDP for a ten-year period. None had run a surplus as large as the one Greece would need.
The Greek surpluses are now smaller under the new bailout deal, with an aim for just 3.5% of GDP. But of course, that means drawing the process out over a much longer period of time.
The country could get debt relief, as the IMF is proposing. But there’s a catch. The country’s European creditors are offering “debt-mitigating measures that would be granted only once the commitments to reform from the Greek authorities has been demonstrated.”
Those measures are the same ones in the passage above which have been so difficult (or impossible) to implement over the last five years. Without a sudden burst of success in bringing them in now, debt relief will still be contested.
The problems reinforce one another — debt relief is now attached to the implementation of practically impossible reforms. Onerous debt repayments are likely to mean lower growth. Lower growth, or recession, means higher debt. Failed privatisation means that revenue will have to be found somewhere else to make debt repayments.
Europe may yet be able to work out some way of keeping Greece in the euro in the long term — but this deal isn’t it.
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