Extend and pretend one more time

Thanos Davelis, Director of Public Affairs, HALC

Europe breathed a sigh of relief last week after reaching an agreement to release the next tranche of its 86 billion euro bailout to Greece, preventing a default in payments in July. Prime Minister Tsipras hailed the deal as a decisive step for Greece on its path to exiting its economic crisis. Germany managed to postpone addressing debt relief measures for Greece — where concessions to Greece are deeply unpopular — until after its domestic elections. Additionally, the IMF committed to join the bailout “in principle.” In the short term, it looks like everyone left the meeting happy. A closer look at the deal, however, raises the question: “Is Europe’s refusal to address debt relief simply prolonging Greece’s ordeal?”

Greece’s debt crisis began in 2010, when it received its first bailout and Europe managed to avoid a chaotic “Grexit.” In exchange for bailout loans — Greece is currently on its third bailout — Athens’ creditors required successive governments to impose crippling austerity measures and reforms. Seven years on, Greece has yet to emerge from its most devastating crisis since World War II. Unemployment is at 22.5%, with youth unemployment nearing 50%. Greece has lost nearly 25% of its GDP. Government spending on health was almost halved between 2010 and 2015, and the education budget was cut by 20%. Austerity measures have disproportionately hit the poor the hardest, while pensioners, who have seen their incomes slashed multiple times, are often the sole means of support in a household.

Austerity only policies are a failure, and the Greek people are a testament to this. Without a serious growth plan and much needed debt relief Greece runs the risk of a prolonged crisis and a fourth bailout. In the buildup to Thursday’s crucial Eurogroup meeting, Prime Minister Tsipras was adamant that dealing with the debt is the key to future growth. Government representatives reiterated the need for a debt relief agreement that would give “clarity to the markets, but of even greater importance, renewed hope to the people of Greece.” Unfortunately, the deal reached at the Eurogroup meeting offers neither.

Greece’s creditors unlocked €8.5 billion of the bailout fund, but Eurozone finance ministers put off a final decision on debt relief measures until next year. In its statement after the meeting, the Eurogroup announced its commitment “to provide support for Greece’s return to the market…” This promise is disingenuous, at best, without concrete debt relief measures. Bailout funds are crucial for Greece to avoid a default on debt repayments due in July. Ignoring the heart of the problem — relieving the country’s crushing debt burden — only kicks the can down the road, delaying Greece’s economic recovery.

It is difficult to envision a scenario where Greece successfully exits its bailout, returns the markets, and achieves sustainable growth without debt relief. Greece’s debt currently stands at more than 180% of GDP. Debt relief will not only set the stage for a Greek recovery, but will also stabilize and strengthen Europe as a whole. Emmanuel Macron, France’s new President, is well aware of this fact. He has said he will “lead the fight” on debt relief because “there’s no chance of returning to a stable economy and society in the Eurozone with the current level of debt.”

Prime Minister Tsipras may have hailed the deal as step in the right direction, but a look at the headlines on Greece over the last seven years indicates that there is no real recovery without debt relief. Ultimately, the current deal is simply more of the same “extend and pretend.” This brings us back to the questions raised earlier: whether Europe’s refusal to tackle the issue debt relief is simply prolonging Greece’s ordeal.

The answer is “Yes.”