Mission Accomplished? Doubts Remain About the Greek Bailout

The success of the European institutions is reflected in the Greek government’s clear rejection of a fourth rescue package. Athens clearly has no regrets about bidding farewell to the overseers originally known as the “troika”—which is regarded as a good sign that Greece is eager to stand on its own two feet again. The financial aid invested—EUR 276 billion from European aid funds and the International Monetary Fund (IMF) alone—appears to have yielded a substantial rescue dividend. Does that mean “mission accomplished?”

Wrapping up the Greek bailout effort isn’t that simple. Both Greece’s European partners and the IMF are aware of the danger that Greece might abandon the current reform path, bringing the economic recovery to an abrupt halt. There is also an explicit acceptance that Greek banks could find themselves in trouble again due to toxic loans or that Greece’s national finances could be overextended by taking on new debt at market rates. The sustainability of Greece’s debt mountain, which will still be the highest of any EU member state in 2018, at around 178 percent of gross domestic product, remains a huge concern. In recent years, the IMF advocated direct debt relief, feeling that the growth rates and primary budget surpluses required to achieve sustainability were too ambitious. The European partners could not bring themselves to take such a step, but repayment schedules were extended and interest relief was granted. This is also where a new package of debt relief for Greece comes in, with a further extension of repayment schedules and favorable interest rates, supplemented by a liquidity buffer and an agreement to grant additional debt relief in 2032 if needed. It is probably safe to conclude that this indirect debt forgiveness is a face-saving device for the European partners.

This highly visible safety net for Greece’s mountain of debt is not the end of the story, however. Quarterly monitoring by the EU Commission is aimed at ensuring Greece sticks to its promises on stability and growth. Since there are no new demands, conditions, or additional financial aid involved, this does not represent a fourth rescue package. As with the other crisis-hit countries that were able to exit their rescue programs, it is an attempt to ensure the “patient’s” full recovery by providing a kind of “aftercare.” The only potential leverage here is the continued granting of debt relief, which is subject to positive audit reports. However, since debt relief for Greece is intended to prevent a new debt crisis and the associated contagion affecting other eurozone countries, use of that leverage looks rather unlikely.

But are the barely concealed doubts of Greece’s rescuers about the success of their own bailout program justified? A closer look at the reform policies and Greek economic performance shows that those concerns are warranted.

Greece has not implemented all the promised structural reforms yet, and even after successful implementation, the effects will not be felt immediately. It is a mistake to assume that Greece can achieve strong growth virtually overnight at the flip of a switch. The fact is that Greece’s problems are not so much cyclical as structural in nature. Despite the debt issues that remain the focus of public attention, the Greek crisis was essentially a structural crisis.

Since successful reforms take a while to translate into economic growth, international business location rankings are a helpful way of assessing Greece’s progress. There would seem to be plenty of room for improvement, with Greece currently ranked 67th in the World Bank’s Doing Business ranking. Malta is the only EU country that fares worse. The Global Competitiveness Index compiled by the Davos-based World Economic Forum, meanwhile, puts Greece in 87th place—below every other EU country. This raises major questions about the attractiveness of Greece to investors. Having said that, it is at least relatively easy to identify specific action that Greek policymakers can take to improve matters.

The recovery of Greece’s real economy likewise fails to impress on closer examination; the country is still a long way from achieving strong growth. In 2017, the Greek economy delivered growth of 1.4 percent after nine years of contraction, but even with the 2 percent increase expected this year Greece is still one of the weaker economies in the EU. Replacing the loss of economic output experienced since the outbreak of the crisis, which now stands at 25 percent of GDP, will be a very slow process at this rate of growth. The same applies to household incomes in Greece, which have fallen at least as sharply and created a poverty problem.

The Greek labor market situation also leaves little room for euphoria. Although the monthly unemployment rate has fallen below 20 percent again for the first time since the crisis, Greece still has the highest unemployment rate in the EU. The same is true of youth unemployment, which stood at 44 percent last year, sending a devastating signal to young people entering the labor market. Moreover, employment trends are not very promising. Almost one in five jobs were lost between 2008 and 2017, with a third of industrial employment and more than 60 percent of construction jobs being cut. New jobs, by contrast, tend to be in the low-wage sector, particularly in tourism-related services, while higher-paid jobs are disappearing. The share of part-time jobs in the now much smaller Greek labor market is also increasing. Formerly highly coveted careers in the public sector are (currently) not an option due to government spending cuts. Overall, these employment trends cannot restore past prosperity and will instead see a return to the modest standard of living prevailing in the 1980s and 90s.

Better goods export performance appears to constitute a success story, with a rise of almost 30 percent since 2008. However, this increase must be set against the fact that exports grew across all EU countries during the same period; Greece has merely managed to maintain its 0.6 percent share of total EU goods exports. Nor has the quality of Greek exports improved. Oil, oil products, agricultural goods, and other raw material-intensive products continue to dominate. “High-tech made in Greece” is conspicuous by its absence in the export statistics. The country simply doesn’t have the associated industrial jobs. Pharmaceutical products, the only category of any significance that looks “modern,” are mainly exported in the form of generic drugs, which can be made in many countries around the world.

Greek service exports are also weak when seen in context. Despite the boom in tourism, last year still fell short of 2008 export levels. Rising income from tourism is offset by a sharp drop in earnings from marine transport, which is susceptible to volatility. In addition, there is a dearth of value-adding business services that could boost the figures and provide attractive job prospects.

Despite these many shades of gray and the risks that remain, ending the Greek bailout program was the right decision to make and can only work to the country’s benefit. Now that the worst has been averted, responsibility for economic policy once more rests largely with the elected policymakers in Greece. They now have the opportunity to take control and put their own stamp on the reforms, thereby enabling the populace to identify with the process in a way that has so far often been lacking. Going forward, neither a “troika” nor the eurozone finance ministers will be scrutinizing Greek policy during long late-night meetings. Instead, from now on the “markets” will give their verdict, as reflected in changes in interest rates, levels of foreign direct investment, and sales of Greek goods and services. The European partners should continue to offer technical assistance, but otherwise “normalize” their relationship with Greece. They should not drown out market signals through a latent willingness to provide another bailout—because that could quickly result in the failure of Greek efforts to complete the rescue on their own.

Coverfoto: © European Union 2015 - Source Council of the EU

The Kiel Focus series presents papers on current economic policy topics. Their authors are solely responsible for their content and their views or any policy recommendations they may make do not necessarily represent the views or recommendations of the Institute.