A light at the end of the tunnel?

By Thanos Davelis, Senior Research Associate, HALC

Greece reached a deal with its creditors amid tense negotiations late last week. Statements from government officials in Athens and Brussels heralded a “breakthrough” in stalled negotiations, signaling that a deal preventing a Greek default this summer is around the corner. “Greek Bailout Talks Make Major Breakthrough on Reforms” was the lead article on the topic in The New York Times last Friday. This headline, however, could easily apply to any number of headlines since the beginning of Greece’s protracted economic crisis. Looking at articles from the beginning of the crisis to today, one can clearly see the same issues playing out in a never ending cycle of negotiations, concessions, austerity measures, and new bailouts. Ultimately this begs the question: How many more rounds must Greece endure before austerity only policies are dropped?

Headlines from The New York Times on Greece’s economic crisis since 2009.

Greece is often compared to a sick patient, and its creditors the tough loving doctors prescribing painful, but necessary medicine. What does Greece have to show for all the pain its citizens continue to endure? Tense negotiations, debt repayment deadlines, crippling austerity, three memorandums, and the promise that one day Athens may receive the debt relief it so desperately needs. A look at the numbers suggests the dire situation Greece’s economy is in. Since 2010, Greece lost nearly 25% of its GDP. Over the last 10 years a total of 244,712 companies dropped out of the economy. Unemployment is at 24%, while youth unemployment is at a staggering 50%. Close to half a million Greeks — many of them young and educated — are believed to have migrated since the beginning of the crisis in search of better opportunities. The poorest 20% of Greece’s people have suffered a 42% drop in disposable income since 2009, and pensioners, who have seen their incomes slashed multiple times, are often the sole means of support in a household.

The latest breakthrough in talks is correctly hailed as a “huge relief” for Greece and Europe in the short-term. Greece and its creditors are finally on a path to conclude marathon negotiations to wrap up the latest bailout review. With debt repayments due this July, Athens desperately needs an agreement to obtain much needed funds and avoid default. As part of the breakthrough deal, Athens agreed to more austerity measures. Pensioners will face a new round of cuts, and tax reforms that will lower the current income tax exemption threshold. In return, representatives of the creditors will return to Athens after Easter for another round of talks to formally conclude the second review. Only then, according to Eurogroup chair Jeroen Dijsselbloem, can Eurogroup ministers look at Greece’s debt sustainability. Prime Minister Tsipras, however, is stressing that debt relief measures must be agreed to, otherwise Athens will not implement additional austerity measures.

Greek pensioners take part in a demonstration against planned pension cuts in Athens, Greece April 4, 2017. REUTERS/Alkis Konstantinidis

Europe’s leaders must recognize by now that new rounds of negotiations and payment deadlines loom on the horizon unless Athens receives significant debt relief and a real plan to boost growth. The Greek finance ministry reported in February that the government’s debt load is now €226.36bn. Governments and institutions across the board recognize that debt relief is necessary. Most prominently, IMF leadership has consistently stated that it will not join the current bailout unless Europe provides concrete measures to grant Greece debt relief and make its debt burden sustainable.

While there is an obvious need for reforms within Greece, insisting on more austerity only policies without addressing Greece’s mountain of debt will only perpetuate the Greek people’s misery. It has become painstakingly clear that unless creditors seriously address debt relief, the headlines on Greece we’ve become so accustomed to will remain the same.

Pierre Moscovici, the European commissioner for economic affairs, recently said:

“We need to show [the Greek people] that there is light at the end of the tunnel of austerity. Everyone has agreed on this fundamental principle.”

Europe, as Moscovici indicated, can and must provide that light at the end of the tunnel. The only question is, can it find the political will to grant much needed debt relief?