The focus is back on the debt crisis in Greece, where a three-party governing coalition is struggling to come up with a new economic reform program that can secure parliamentary approval. Meanwhile governments, such as Germany’s, that extend support to Athens, are considering how best to approach their own legislatures with Greece’s request for even more aid.
We expect the various European officials to find a way to sort all this out over the next few weeks – not because they believe in the outright merit of what they are doing but because they fear the alternatives. But that means lots of unsatisfactory and unsustainable compromises. And by failing to address the underlying issues, yet another Greek rescue will stand no greater chance of success than previous ones. Meanwhile the trust of Greek citizens in the credibility of government and institutions will erode further.
Greece is seeking to finalise three distinct elements of its revamped program: cuts in spending and tax rises, labour market reforms, and additional external financing from its European partners and the International Monetary Fund.
All three are the outcome of disappointing economic and financial developments: gross domestic product has contracted more than anticipated under prior bailout agreements; unemployment has risen further; domestic payment arrears are at record levels; and debt is way too high. Part of this reflects incomplete policy implementation by Greece, and part is due to problems in the design of previous programs.
In order to secure additional financing, Greece’s governing coalition is very close to finalising a new fiscal package involving further cuts in the public wage bill, pension reductions and a broadening of the tax base. Coalition negotiations on labour reform – entailing lower firing hurdles, changes to the minimum wage legislation, and weaker collective bargaining – are proving more difficult. While one of the parties may withhold its support the two others will likely press ahead nevertheless, securing legislative approval by late next week, albeit via a very noisy process.
Government action is facilitated by the leniency being shown yet again by the troika of external creditors (the European Central Bank, European Union and the International Monetary Fund). Rather than pull the plug on Greece after yet more policy shortfalls, the troika has agreed to extend the fiscal adjustment period and commit billions more euros to support the country. As some of the funding requires individual country approval, several governments (including Germany’s) will need to deal with their own parliaments on what has become an increasingly unpopular issue among their citizens.
We expect this too to be worked out in the next few weeks. Yet it is hard to find many officials who believe that the revamped Greek program will do what all of us hope for – namely, restore economic growth, jobs and financial stability.
Rather than provide a solution, the current approach seeks to buy more time and to avoid fundamental decisions. Judging from signalled actions (as opposed to the diplomatic words), there is insufficient commitment to retaining Greece within the eurozone, and there is no plans for an exit that minimises dislocations.
If the underlying objective were for Greece to remain a eurozone member, we would see much greater emphasis on official debt forgiveness, as recommended by the IMF; and ample multi-year long-term funding would be made available at low interest rates to support growth-enhancing measures. If the objective were to safeguard Greece’s wellbeing outside the eurozone, there would be much greater emphasis on how Greece could best return to a national currency, while staying within the European Union (as opposed to the eurozone), and deal with the convertibility and debt challenges that would come with this transition.
Instead, Greece and the troika have opted again for the muddled middle – one that talks about sustainable eurozone membership but does not do enough to make this highly probable.
While such a tactical approach may seem attractive, it is far from costless. Nor is it sustainable over the medium-term: it further undermines Greek citizens’ trust in domestic and European institutions – trust that is already at breaking point, if not broken. The Greek government, meanwhile, could lose control of the country’s management. With that, the threat would increase of a highly disorderly outcome – a sudden and unplanned Greek exit from the eurozone for example – which would result in further deprivation and poverty, and significantly increasing the already-considerable trials facing Greek citizens.
Mohamed El-Erian is the chief executive and co-chief investment officer of Pimco.