Greek debt: from a shared responsibility to shared efforts

Carole ULMER

Director of Studies, Confrontations Europe

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A four-month extension to the Greek aid programme was agreed on 24 February. A short respite, but the hardest part is yet to come. The Syriza government must substantiate its programme of reforms. The Greeks voted for Syriza because it promised change, but they have withdrawn around €2 billion from their bank accounts! They are deeply confused.
Could Grexit be the best option for them? Valery Giscard d’Estaing believes it is the only way to get the Greek economy back on its feet. However, it is not what Syriza wants right now. It wants to renegotiate the terms of the bailout agreement. There is no doubt that Grexit would be brutal. What would the consequences be? Greece would default on its debt and would no longer have access to the financial markets. It is highly dependent on imports, the cost of which would skyrocket. As a result, it would have to turn to China or Russia for assistance. As for the Eurozone, some believe the new governance structures established since 2012 would reduce the risk of contagion. Greece’s exit would nonetheless strike a severe blow to monetary union! Because it would undermine the public finances of creditor nations. Because it would ramp up political tensions across the EU, between governing parties and “outsiders”. Because it would weaken countries that have introduced tough reforms. But above all because it would prove that Eurozone membership is not irrevocable and would therefore considerably weaken the EMU by reducing it to a currency area with a fixed peg. The suggestion that a Euro does not have the same value everywhere would be corroborated. It would not be in anybody’s interest if that were to happen.
So what should we do about the Greek debt? The Greek debt amounts to €321 billion, i.e. 177% of Greece’s GDP. 80% of it is held by the Eurozone and the IMF. Who is responsible for it? Many economists believe responsibility is shared. Successive Greek governments have contributed to their country’s financial failure. In 2007, Greece spent more than 14% of GDP above what it produced! Its total public and private debt was twice as big as Spain’s. Greece’s responsibility is undeniable. But for every featherbrained borrower, there is a featherbrained lender! The banks in northern Europe made huge profits. Only a very small proportion of the loans issued by the Eurozone and the IMF have gone to the Greek people (16% to pay off the interest on the national debt and 11% to pay for the Greek government’s activities). The rest has mainly been used to repay creditors, in other words “northern” banks! Embarrassing.
The possibility of restructuring the Greek debt was envisaged as of 2010, but it was rejected because of the fear of contagion across the rest of the Eurozone. Should the Greeks be expected to pay for this delay? Thomas Philippon, a professor at the NY Stern School of Business, thinks not. Greece’s debt amounts to 177% of GDP, 30% of this debt can be attributed to the collective management of the crisis and should therefore be shared. Of course, Greece has advantageous loan conditions. However, requiring Greece to meet a primary budget surplus target of 3% this year and 4.5% in 2016 is very harsh.
Everybody must be willing to make an effort and to grant concessions. “The Eurozone must continue to bend, if it is not to break”. Let’s listen to what Greek voters want, but not let ourselves be blackmailed. Let’s encourage a responsible debt restructuring plan by reducing the primary surplus required, extending debt maturities and lowering interest rates to lighten the burden. But such measures must be accompanied by in-depth reforms and extensive reorientation of the Greek economy. Let’s support the new government in its efforts to develop Greek production capacity: that is the best hope for the Greek people’s future.
2 Keneth Rogoff, « Quel plan B pour la Grèce ? » Les Echos, February 27th 2015

The Greek economy : State of play and necessary reforms
Greece’s GDP is 26% lower today than it was in 2008. Yet the Greeks are not the “worst off” in Europe: Lithuania has a GDP per capita of €11,800, compared with €16,500 in Greece. Despite that, Lithuania pays into the European Stability Mechanism, which provides financial assistance to… Greece.
The structure of the Greek economy is a problem, as it exports very little (the Germans import only 0.2% of their goods from Greece). It must increase its productive capacity. Its exports consist primarily of petroleum products, followed by agricultural and food products. Manufactured goods accounted for only 36% of Greek exports in 2013.
The need for reform is incontestable. Priorities include: “combating tax evasion and fraud by modernising the tax and customs authorities” in order to create a new culture of tax compliance; “pursuing reforms to modernise public services” (tax collection, statistics, etc.); and “controlling spending” and “modernising the pension system”. Syriza has pledged not to cancel ongoing privatisations, and to maintain privatisation programmes for which a transfer process is already underway. The next few days will shed more light on the reforms planned by the new government.

Carole ULMER

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