Greece is as sick as ever and its agony goes on and on

Greece is as sick as ever and its agony goes on and on

Medical metaphors are all too appropriate when summing up the years in the eurozone

Tony Barber

4 HOURS AGO by: Tony Barber

https://www.ft.com/content/d78f73a0-f1d2-11e6-95ee-f14e55513608

In May, Greece will start its eighth year as a patient in the hospital for financially wounded eurozone countries. Having joined Europe’s currency union in January 2001, and having received the first of three rescues worth a combined €260bn in May 2010, the country is on course for a fourth aid transfusion next year. Barring wholly improbable changes in the politics of European crisis management, Greece will earn the unwanted distinction by late 2019 of having spent more of its eurozone existence in an intensive care unit than outside.

In an address on Saturday to his ruling Syriza party, Alexis Tsipras, prime minister, described Greece as “making sacrifices in the name of Europe”. He spoke as if Greece were some invalid suffering not for the sake of regaining his own health but to improve his doctors’ reputations. These are the eurozone and International Monetary Fund consultants who bicker at Greece’s bedside over what treatment to prescribe next.

The creditors will probably find a compromise between themselves and the patient will have little choice but to swallow their terms. Without such a deal, the combination of Europe’s electoral calendar and Greece’s debt repayment schedules would put the nation on life support systems by July. Two years after its appearance in the turbulent summer of 2015, Grexit, or Greece’s exit from the eurozone, would re-emerge as a serious prospect. This would be the most extreme surgery of all but it is far from unimaginable.

In assessing Greece’s unhappy years in the eurozone, medical metaphors are all too appropriate. For the fundamental question is whether, in their hearts, either eurozone governments or the IMF or Greece’s political leaders and citizens believe that seven years of expensive treatment have brought a cure even remotely within sight.

This question has three parts. The first concerns the country’s ability to repay all its debt. Debt is the issue that most sharply divides eurozone creditors, especially Germany and like-minded northern European allies, from the IMF. In its latest assessment, the fund states flatly that Greece’s debt is “unsustainable”, predicting that on current trends it will explode to 275 per cent of annual economic output by 2060 from 180 per cent today. Substantial debt relief is essential, the IMF concludes.

The fund does not propose explicit write-offs, known as “haircuts”, by Greece’s official European creditors. Rather, the IMF envisages a mixture of extended maturity and grace periods for the country’s repayments, plus very low fixed interest rates on its loans. In this way the anticipated cycle of higher global interest rates would not overwhelm Greece’s chances of recovery.

If the IMF pulls out, Europe will be free to mismanage the crisis on its own

Eurozone officials reject the IMF’s diagnosis, suggesting somewhat airily that the world’s premier financial institution fails to understand the mechanics of eurozone rescue programmes. Privately, of course, all concerned know that the bloc’s resistance to debt relief is rooted in national and EU politics. Creditor governments fear a backlash against themselves, perhaps against the euro itself, if ever it dawned on voters that billions of euros supplied to Athens had gone up in smoke.

The second part of the question relates to government budgets. Eurozone creditors contend that Greece’s recent success in running a primary budget surplus — that is, excluding interest payments — shows that the public finances are getting stronger year by year. Consistent surpluses will keep the debt burden under control. The IMF is more pessimistic, perceiving a historical trend of Greek political parties abandoning fiscal discipline and lavishing public money on favoured clients and powerful interest groups.

The third, arguably most important, part of the question is whether the eurozone-IMF rescue programmes have helped to modernise the Greek state. All the creditors, and many of the country’s politicians, are doubtful. Tax collection rates have actually fallen since 2010, despite efforts to strengthen the tax system. “The state of the [public] administration and of the health, education and justice systems is worse than at any time in the recent past,” says Yannos Papantoniou, a former finance minister.

Greece’s paralysis is set to continue as long as eurozone creditors refuse to grant Athens extensive debt relief, yet refuse to bite a different bullet by letting it drop out of the currency union. The lack of a decisive push in either direction creates just enough space for Greece to do the minimal amount of reform required to keep aid flowing.

In this sorry state of affairs no one is a winner, and certainly not the Greek people.

tony.barber@ft.com