The Perpetual Greek Crisis

Once again, Greece is making headlines for its economic troubles as it heads towards a major confrontation with its European creditors and the IMF. Tensions over bailout negotiations are on the rise and many are worried Athens will see itself in irremediable debt in the near future, considering the IMF is not participating in the latest bailout program. While the €110 billion financing plan with the IMF – the largest aid program in history – should have helped Athens regain its footing, Greece is still dependent on its €86 billion emergency loan package and has started its third Eurozone bailout program. Amid the uncertainty of its economic troubles, Greece has to honor a €7.4 billion debt repayment by July to the European Central Bank or will risk losing the aid packages that are keeping the government from the brink of collapse. With elections looming and public discontent growing, Greece needs to focus on long-term reforms that will create investor credibility and confidence for IMF funds in the future.

The need for change is more pressing than ever. The arrangement of this third bailout represents a change in policy for the IMF that could be a sign of troubling times ahead. The major difference between the third bailout program and the previous two is that, this time around, the IMF is not directly participating. Unless Greece accompanies the bailout with a verifiable strategy of debt relief and sustainability, the IMF will limit its role to that of an adviser and monitor of Greek economic performance. The lack of IMF presence poses an issue not only for Greece, but also for European creditors. The IMF’s expertise lends more credibility to bailouts, signaling to investors that payments are more likely to be met. This aura of legitimacy has played a paramount role in the success of bailouts in other Eurozone countries such as Portugal and Ireland. Moreover, Netherlands and Germany will only give Greece more loans if the IMF joins the aid program. Greece faces the risk of once again defaulting on its debt repayment in July. Yet as months have gone by and the IMF continues maintaining its observational role, it seems unlikely it will enter the bailout program now.

Given this worrying shift in IMF policy, the Greek government can no longer continue living in denial about its financial crisis. Yet this realization has not dawned on many Greek leaders. Eight years after the first inkling of a crisis in Greece, Greek politicians are still trying to find convenient scapegoats. For instance, they have repeatedly tried to imprison Andreas Georgiou, a statistician who worked in the IMF and the former chief of Greece’s statistical agency, for allegedly inflating the budget deficit and debt figures from 2009. Eurostat has validated his figures, and Georgiou has been acquitted in four trials since his initial arrest in 2011; however, Greek politicians have somehow failed to accept their own responsibility and have instead pushed his case to the Supreme Court.

Georgiou’s prosecution has sent a dangerous warning to government statisticians, disincentivizing them from publishing any news about the economy that can be interpreted as ‘undermining the national interest.’ This is concerning given Greece’s history of subtly falsifying economic statistics, like in 1999 when they became eligible to enter the Eurozone only by manipulating their budget deficit for that year. Georgiou himself faced strong opposition and union strikes when he adopted Eurostat statistical standards as the former President of Hellenic Statistical Authority (ELSTAT), an independent statistical agency formed as a condition of an earlier bailout. Although Greece as an EU member state is required to follow Eurostat guidelines, many politicians pushed to maintain the inaccurate 2009 budget figure. The skewed figure was even used in calculation of Greece’s €86 billion bailout. By curtailing the circulation of reliable information and discouraging statisticians and economists from proposing lasting solutions, Greece has forced itself into a dark future where economic growth is even more unreachable.

There are also more structural factors at play in Greece’s continuing crisis. Prime Minister Alexis Tsipras has yet to make good on his promise to “radically reform” the public sector and limit tax evasion. Although his election campaign championed Greece’s self-sufficiency, in previous bailouts he has tried and failed to loosen the creditors’ preconditions for the bailout. He has landed Greece in a crisis of circular reasoning – he requires the implementation of the bailout program to restore economic stability and stabilize debt relief, but the bailout program will only be successful with the participation of the IMF, which is unwilling to participate unless Greece implements a credible system of sustainable debt relief programs. In order to satisfy the austerity preconditions for the bailout, Tsipras has tried to raise taxes, a move that has been unpopular, instead of cutting government expenditures. Afraid of losing any more political power, Tsipras is hesitant to enact unpopular reforms. This creates an environment for political instability and dissolves any prospect of implementing long-term reforms to the judicial system and administration, limiting the government to a mainly economic role. 

This crisis has pointed out the potential difficulties of maintaining power as a populist party. In 2015, Greece was the first EU country to vote a populist party into power, its populace having become infuriated with the establishment parties in recent years. While Tsipras once had an 80 percent approval rating, he faces an inevitable conflict when presented with the reality of leading a country – balancing public support and implementing beneficial but unpopular policies. When he failed to deliver on his promises, his popularity plummeted. As the success of a populist party is dependent on its public support, his government has steered clear of unpopular policies. However, this reluctance to enact strong economic reforms is untenable in a country that is faced with a seemingly permanent financial crisis. Although Greece’s economic growth is projected at 2.7 percent this year, it has continued to lose economic value since 2009, and investment is expected to drop below 10 percent of its GDP.

An unlikely saving grace comes in the form of possible ‘snap elections‘ this year, if the present parliament cannot hold its own. Until now, the government has maintained a slim margin of three seats over its opposition. However, because of the persistent economic instability and increasing domestic disappointment with austerity, the center-right New Democracy party is gaining popularity as opposition. While a new government could introduce political instability, it appears the New Democracy favors strong structural labor reforms and reduction of government expenditure on public administration to attract foreign investment. It is likely that a possible election could temporarily add to the volatile situation in Europe, with its barrage of elections already lined up. That said, the New Democracy approach could help restore confidence in the Greek economy in the long term, even at the price of short-term political instabilities. Countries such as Latvia have implemented structural reforms for IMF aid, and despite immediate fiscal imbalances including high unemployment rates, their economies have started to recover. If Greece doesn’t radically change its domestic economic policies, through a new government or otherwise, it may become closed off from financial markets indefinitely.

That said, the New Democracy approach could help restore confidence in the Greek economy in the long term, even at the price of short-term political instabilities.

Even if elections occur, the government needs to understand the severity of the situation. Greece cannot continually refuse to enact legislative measures to reform the labor market and the energy sector. Under the bailout programs, European creditors will only continue to give aid on the condition that Greece implements discussed economic reforms. Thankfully, on April 7, Greece agreed to terms that would create an influx of money into the federal government: reducing its budget for pensions from 2019 and reducing the tax-free minimum threshold from 2020, effectively increasing the income tax. Despite the unpopularity of such policies domestically, this agreement hopefully indicates that Prime Minister Tsipras is willing to risk domestic discontent in light of fears that European creditors will stop releasing money. But he faced a similar impasse in 2015, when the negotiations were delayed for so long that Greece defaulted on a payment to the IMF – the impetus for the current bailout program. If Greece doesn’t implement structural reforms, there it is likely that Greece will need a fourth bailout, which will further delay economic growth.

With a national political crisis and seemingly inescapable economic calamities, Greece has to realistically weigh the solutions at its doorstep. One of the possible solutions includes Greece exiting the EU. A return to the Drachma could potentially help the economy, but there is no evidence Greece would be able to deal with the structural results. If Prime Minister Tsipras is unwilling to reform the economy and his popularity continues to decrease, Greece’s future could potentially lie with the New Democracy party. In either case, it is becoming increasingly clear that the Greek government needs to re-evaluate the gravity of the situation it finds itself – or, rather, has put itself – in today.

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