The EU Bailout for Greece: Making it our Own


Professor of International Relations and director of the Center for International Studies at the University of Oxford and Professor of European Politics and Economy at the Athens University of Economics and Business (AUEB)

After 6 years of Great Depression, Greece signed its 3rd Memorandum of Understanding (MOU) in August, an understanding with its EU partners as to the conditions for being bailed out yet again. What should we think about this deal?
First, the size of fiscal adjustment required. The program envisages a gradual fiscal path to a 3,5% primary budget surplus for 2018 and beyond, with intermediate targets of -0,25%, 0,5%, 1,75% for 2015, 2016 and 2017 respectively. This target is ambitious, reflecting the (perceived) political constraint of donors who cannot ask their tax payers for a sacrifice without a Greek one in return. It is certainly more realistic, however, than the prior unattainable 4 and 4,5% targets.
It seems that the creditors have (at least partially!) learned their lesson that squeezing out a large size of fiscal savings in a shrinking economy only ends up amplifying recession, leading to a vicious circle of target slippage, further fiscal measures, and so on. Still, the transition to the primary surplus targets of 2017 and 2018 can be very onerous, and can only be attained if the economy has returned to a high and sustainable rate of nominal GDP growth.
The silver lining on the fiscal austerity side, however, stems from the flanking measures of the overall “package deal” of which the MOU forms part. Greece’s inclusion in the ECB’s quantitative easing (QE) program premised upon a successful 1st review, the recapitalization of banks, restoring conditions of financial intermediation, the anticipated debt relief, by way of maturity lengthening, moratoria and interest rate reduction, the so-called “Juncker plan”, that is an investment package of EUR 35bn, will together improve Greece’s long-term fiscal and growth outlook. Cumulatively, they could support the growth stimulus that would generate the fiscal savings required to finance the transition to higher primary budget surpluses
Second, the structural measures laid out in the program. The program’s logic is to combine a softening of the fiscal consolidation path with ambitious, far-reaching, and heavily frontloaded structural reforms, around four pillars: fiscal sustainability (pension and tax reform); financial stability; growth and investment; public administration.
Overall, Tsipras has committed the Greek state, yet again, to structural reforms that are long overdue and likely to enhance Greek medium-term growth potential.
On the state capacity side, what is not to like in measures meant to make it easier to collect tax revenues and tackle evasion? accelerate the judicial process? make public procurement more transparent? better safeguard market competition against oligopolies? reduce bureaucratic impediments to business activity and investment, such as streamlining licensing of enterprise? evaluate and depolitize public administration? Make social security sustainable? strengthen state capacity in education, vocational training and labor market capacity building?
On the business environment side, the 3rd MOU represents a more balanced attempt than its predecessors, overly focused on private sector labor costs, to increase efficiency by improving competition in the energy, wholesale trade, construction, e-commerce, media and manufacturing sectors.
Beyond, the question of austerity per se, we see two main weaknesses in this reform plan. First, the program is skewed towards improving long term fiscal sustainability, and pays less attention to the sustained performance of institutions (such as in the justice system and the enforcement of contracts) or the sustained shift of the growth model towards greater reliance on tradeables and exports.
Second, the program’s credentials are mixed when it comes to fairness and social justice. To be sure, it serves social justice to tackle tax evasion, corruption, or market oligopolies and widen the tax base; it serves intergenerational justice to transfer resources from a pension system absorbing one of the largest percentages of social expenditure in the EU towards investment in job creation, in a society where nearly 6 out 10 youths are unemployed; and the introduction of a Guaranteed Minimum Income scheme, even if at a low level, will finally introduce Greeks to the virtue of a universal safety net. At the same time, the austerity policies of the last 5 years have dramatically worsened poverty and inequality indicators, and the further planned reduction of social expenditure, including in public health and the lowest pensions (planned savings from 1,3% to 1,9% GDP annually in 2016-18) could well exacerbate this effect.  While the broadening of the tax base is a good thing, VAT hikes are regressive (1,1% GDP per year) and abolishing the VAT discount for the most disconnected islands undermines regional cohesion; and abolishing preferential tax treatment for farmers (rate set at 20% in 2016) could drive away younger farmers from a tradable sector that is key to Greece’s new growth model.
In these respects, only the Greek governments, political system, and social partners, can prove the critics wrong, who rightly castigate a program imposing further austerity measures on top of a recession. If this program is to end up favoring a return to sustainable recovery from next year onwards, and do so in a socially responsible way, we Greeks need to make it our own.

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