What’s Next for Greece?
Athens and its creditors are close to a final agreement on the latest bailout. But no one is addressing the issues at the heart of Greece's economic problems.
There is no respite for Greece. July was a most dramatic month: Greeks rejected the terms of a new bailout, then the government signed off on a new proposal with similar — perhaps even more onerous — terms. As Greece and its creditors near a final deal, it feels like we’re back to square one. In fact the third bailout package doesn’t address the country’s key problems of solvency and competitiveness — both critical to being a solid member of the eurozone. The latest bailout should provide a means, albeit only temporarily, to address the former, but what about the latter?
Greece remains the least competitive country in the eurozone. The country’s gross domestic product per capita (adjusted for inflation) has dropped by 5,000 euros to about 17,000 euros since 2008, and the unemployment rate is 25 percent. Growth in total factor productivity, a measure of the economy’s overall economic know-how, has been lower than the median rate in the eurozone countries since 1980, and it was negative from 2000 to 2014. Labor productivity, in turn, is low, especially in comparison with other crisis-hit countries, such as Ireland and Spain — and it’s not growing.
Low productivity is a huge problem for Greece because it affects the country’s competitiveness vis-à-vis the other members of Europe’s currency union. To be competitive in a fixed exchange rate system where countries mainly trade with each other, like the eurozone, what matters is how many foreign goods can be exchanged per unit of domestic goods. If a day’s work in a given industry produces less in Greece than in other countries, Greece will be more likely to become an importer in that industry — unless Greek workers accept lower wages. Yet if letting incomes fall is the only way to increase exports, the overall effect may not feel much like a recovery for many Greeks.
Greece has gone through a severe, but still incomplete fiscal adjustment, which has left the economy depleted and the population angry. And it has not achieved the adjustment necessary to make its goods as competitive as those produced in other countries in the eurozone. Fiscal adjustment — as required in the bailout — without making the economy more competitive means that Greece will continue to consume more than it produces. For years this has been reflected in the large current account deficit that abated only in 2013 and 2014 as a result of the crisis. Supply-side structural reforms — such as, for example, opening up of closed professions and trades, modernizing collective bargaining in the labor market, reforming the public administration, and removing red tape — should improve the functioning of the economy and so spur productivity growth. But reforms take time to deliver the expected impact, and Greece, and its creditors, are in a hurry. (The alternative is to slash prices and wages, but it would be impossible for both political and economic reasons.)
In the meantime, the short-term outlook continues to be bleak. Public opinion remains deeply divided on the terms of the bailout, which includes more austerity measures and the additional privatization — under European Union supervision — of 50 billion euros in state assets. For many, as a result of the agreement, Greece has turned into a colony of Germany. Syriza is split, and support for Prime Minister Alexis Tsipras has eroded; the bailout only made it through parliament thanks to the votes of the opposition parties. At this rate, a return to the polls in the autumn can’t be ruled out.
The International Monetary Fund’s board has not yet signed on to grant a third bailout to Greece, though the country paid its arrears to the fund on July 20. Allegedly, this is because of Greece’s high debt levels and poor record in implementing reforms. A lack of support for a new bailout, even if most of it will come from the European Stability Mechanism, would put the squeeze on Greece again, since another 3.2 billion euros must be repaid to the European Central Bank on Aug. 20. As a result, Greece might need another bridge loan outside the ESM, but Britain opposes offering one. With Greece again unable to pay and with a bailout slow in coming, arguments that it should leave the euro — especially those coming from Germany — will surely become louder.
The road to the Greece’s third bailout, thus, is fraught with hurdles, which add to the difficulties that have been created in the months before the agreement. It is hugely dispiriting to recognize the enormous waste of resources, from destruction of political capital to loss of output and damaged confidence, that this agreement has entailed. And it is even more dispiriting to witness how often the threat of exit from Europe’s monetary union has been waved as a way to enforce fiscal and political discipline. Greece has come out from this blame game in tatters — and so has the European project.
So, what is next for Greece? The most likely path is also the least desirable: pretending that the latest bailout will solve Greece’s problems. It is now clear that another bailout will only temporarily patch up the current emergency, but it looks as though this is what European leaders would prefer to do. A second-best solution is to temporarily suspend Greece from the monetary union in order to acquire some degree of flexibility and so to allow a longer and potentially less painful process of adjustment once the straitjacket of fixed exchange rates has been removed. This is an option that has gained significant traction, especially in Germany, but it presents many practical problems in its implementation and could lead Greece into economic and political chaos.
The best-case scenario would include some debt restructuring — specifically, maturity extension and a haircut for creditors — coupled with a fiscal stimulus package and a comprehensive plan for structural reforms that would trigger growth in the short term and help generate political support for reforms. Specifically, the European Commission should focus on bringing forward the 35 billion euros in support for job creation that are mentioned in the last paragraph in the Euro Summit statement of July 12.
Let’s hope that the fatigue of dealing with Greece — no matter how difficult its government has been in the past months — does not make the rest of Europe think that the second-best solution of suspending Greece from the monetary union would be easier and therefore preferable to helping the country deal with its twin problems of solvency and competitiveness. Stabilizing EU-member states in a sensitive region is surely preferable to kicking a country out of the eurozone — no matter how well the authorities think they could manage that process.
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