FREE FROM DEBT BONDAGE?

The European Union and Greece announced the successful completion of programs for the withdrawal of the latter from the ongoing debt crisis. To announce the event, Prime Minister Alexis Tsipras came to the national parliament in a tie, which he promised to wear three years ago in case his government can solve the problems with the national debt.

Speaking at the parliament, the prime minister said: "We turn the page and start a new period. Social justice replaces the difficulties while uncertainty is replaced with democracy, stability and trust."

Similarly, the EU Commissioner for European Commissioner for Economic and Financial Affairs, Taxation and Customs, Pierre Moscovici, promised a "historic moment" for both Greece and the entire Eurozone. For the European Monetary Union, the end of the Greek aid program is "the symbolic end point of the existential crisis of our common currency," Moscovici said. But is it really so?

Different patients

In 2001, based purely on political considerations, Greece with its backward, predominantly agrarian and non-competitive economy, was admitted to the European Monetary Union. It soon became clear that it was a hasty decision.

The global financial crisis of 2008-2009 touched Europe too - countries with strong economies sustained the blow, but Ireland, Portugal, Greece, and through the fault of the latter Cyprus were doomed to an imminent economic collapse without external support.

The European Union, which for the first time faced such a large-scale problem, was not institutionally ready for solution. Therefore, the taken measures were not always correct. Information used by the financial and political centres of Europe was often incorrect. In particular, it concerned Greece, where later deliberate distortions of economic indicators were revealed.

Financial rehabilitation programs for each of these countries (to make them eligible for loans) assumed significant reduction in the number of civil servants, cuts in salaries, social spending and sharp increase in taxes.

However, all the patients, except for Greece, could solve the problems relatively quickly. Thanks to emergency financial injections, they recovered in 2-4 years and even began to demonstrate some of the best economic performance in Europe, as it is now, for example, with Ireland.

With Greece, everything turned out to be much more complicated. In addition to the objective factor of the impact of the international crisis, Greece also had internal problems - greatly inflated forecasts for GDP growth, poor compliance with the plans to increase the budget revenues, and, finally, deliberately distorted data of official statistics. Turning to the EU in early 2010 for help, the government of Georgios Papandreou had to admit that the budget deficit for the previous year was not 6%, as stated earlier, but 15.7%.

Since 2010, Greece has developed three programs to improve its economy – in 2010-2012, in 2012-2015 and in 2015-2018. In total, the European countries, the IMF and the stabilization funds of the Eurozone (EFSF and ESM) provided Greece almost 400 billion euros of loans at low interest, 107 billion of which in 2012 even had to be written off with another threat of imminent default.

Promises and reality

By the time Greece requested the EU support, the Greek economy fell by 15%, unemployment was 25% (then increased to 27.6%), public debt reached 300 billion euros (further continued to grow), which was almost 170% of GDP. If the country had its own national currency (drachma), the budget deficit could be covered by its emission. When the currency is euro, the only way out is external loans.

Financial assistance required Greece to take tough measures to reduce the budget deficit. Each new program is an additional reduction of spending on social needs, culture, health, an increase in existing taxes, the introduction of new taxes, and many more.

All these unpopular measures provoked mass public protests in the country, which led to a political crisis. Since 2010, four governments have changed, and then in January 2015, on the wave of popular discontent, the Coalition of Radical Left (SYRIZA) led by Alexis Tsipras stepped in. He promised to no longer reduce pensions and other social payments, and generally refused to adhere to the strict requirements of the European Union.

By that time, the second aid program had been completed and preparations were under way for the third, but the new Greek government interrupted the negotiations and even intended to abolish some decisions of its predecessors.

Alexis Tsipras rightly believed that the EU was interested in preventing Greece from default, and therefore had to soften his demands.

In July, to strengthen his negotiating positions and demonstrate popular support, the new prime minister decided to hold a referendum in which the Greeks would vote "in favour" or "against" the creditors' demands. And he himself personally agitated on national television to vote "against". The result of the referendum was expected - 61% of voters supported Tsipras.

After only a week, the Greek government... signed all the EU requirements, which turned out to be even more stringent than those proposed earlier. Otherwise, the country was doomed to default. It was possible, of course, to find loans at market prices, but given the situation, they would have cost at least 40% annually. This is clearly in contrast to 1% of the European stabilization mechanism (the ESM fund was established in 2013). Thus, the new government had to violate the promise given to voters and fulfil 450 various reforms prescribed by the EU.

Attempts to maintain budget surplus

Three years passed, and the Greek economy has indeed experienced a number of positive changes - unemployment has decreased from 25 to 20%, there is little economic growth and a budget surplus. According to the Organization for Economic Cooperation and Development (OECD), in 2018 the Greek economy will grow by 2%, and in 2019 the rate may reach 2.3%.

The situation is not so great with the national debt though. According to EC, the debt will reach 177.8% of GDP, and in the next year - 170.3%. Other statistical data is also not promising. During the crisis, 240 thousand companies were closed and almost 1 million people remained unemployed.

European lenders, of course, agreed to postpone the payment of debts for another ten years, but at the same time put a strict condition - the Greek government should keep the annual budget surplus not below 2-3% until 2060. This means that the national budget will not have the level of flexibility that the government expected even after the end of the assistance program.

Thus, austerity measures are not only not abolished, but, on the contrary, encouraged. For example, pensions are reduced by 40% and will decrease by another 18% from 2019. The retirement age of 67 years should apply to all population (as long as there are a number of exceptions). Other social expenditures will also decline, despite the fact that they have been cut by 70% during the crisis years.

Every three months, ESM experts will visit Athens to monitor the implementation of their instructions. And if everything is in order, then Greece can expect 15 + 24 billion euros to cover loans and other needs.

It turns out that the EU's support ends only formally and the assistance program continues. But what about the assurances of its completion? We think that both sides are interested in them.

Image does matter

Greece will hold elections in 2019. To win them, SYRIZA needs to demonstrate to voters its role in freeing the country from the debt bondage. The EU statements are in fact an evidence of the recognition of the efforts of the Tsipras government. The pre-election campaign of SYRIZA, which contains promises to raise minimum salaries, reduce taxes and cancel a number of restrictions, serves the same purpose. Considering additional commitments to reduce the expenditure side of the budget, these promises seem impossible.

The position of the leaders of the European Union is also clear. An immediate solution would be expelling Greece from the Eurozone once and for ever even if the EU would lose, as it was estimated, about $ 1 trillion. After all, the GDP of Greece does not reach even 2% of the EU's.

But the reputation losses would be enormous in that case. After all, if the EU so easily gets rid of weak members, then international investors have no reason to risk investing in countries such as Portugal, Slovakia or the Baltic countries. This would cause the growth of imbalance in the development of different European countries and end with the collapse of the monetary union as a whole.

Understanding that the budget problems of Euro countries is an objective reality, the EU leaders have decided to create a permanent fund, which will be able to promptly provide loans at low interest to countries that are facing default.

For now, the fund's budget reaches 705 billion euros. The largest share in it belongs to Germany - 27% (190 billion euros) followed by France (16%), Italy and Spain. It is expected that in the future, the fund will have 1 trillion, or even 2 trillion euros.

In addition to practical applications, the fund also has significance in terms of the EU image - thanks to this guarantee, the euro zone countries can rely on concessional financing in world financial markets.

Support for the leaders of SYRIZA also has a basis. The EU has successfully cooperated with this government during the last three years and a new round of negotiators will not facilitate the situation.

Conclusion: although Greece is still very far from economic stabilization, and is facing possible failures in the future, the established connections and mutual understanding between the Greek government and the EU give hope for future success. So, for now, we can fully trust Alexis Tsipras's words about "stability and trust", and Pierre Moskosvici's about the end of the "existential crisis".