Posts filed under ‘economics’
Greek debt report reinforces doubts on bail-out deal
It’s no surprise that the “disciplinary” elements of this week’s Greek bail-out deal have been badly received by many in Greece. Strengthening of the Commission Task Force in Athens to provide an “enhanced and permanent presence” to oversee Greek government measures, and deposit of quarterly debt repayment funds in an escrow account to ensure their availability are difficult for anyone to accept. It’s as bad as having the IMF dictate your economic policy!
But the European Financial Stability Facility must be ratified in the parliaments of 17 countries across the eurozone, so further oversight is inevitable to boost confidence in Greece’s ability to keep its side of the bargain, especially as the economic case for the whole exercise is beset by doubt.
Just as Eurogroup ministers were drawing up the conclusions of the February 21 Brussels meeting, Reuters news agency got hold of the EU’s Preliminary Debt Sustainability Analysis for Greece, circulated as a confidential background document on February 15, in advance of the Council. It makes fairly gloomy reading but provides a template against which actual outcomes for the next eight years can be judged.
For many commentators the analysis has proved that the whole project is condemned to fail, because Greece would never be able to achieve the targets specified in the Eurogroup agreement. Recession in the Greek economy has been deeper than expected, structural reforms are slow to come and debt reduction might be slower than anticipated. It is not an optimistic scenario.
Some factors such as the haircut on private debt seem already to improve on the assumptions of February 15. The Eurogroup has also agreed measures on interest rates and on ECB and national bank transfers which may be helpful. But there are so many other unknowns. The document calculates that a one per cent annual reduction in Greece’s economic growth would increase Greek debt to 143 per cent of GDP by 2020 compared with the 120 per cent Eurogroup target, whereas a one per cent higher growth rate would cut the debt to 116 per cent. The gloomiest prognosis would have Greek government debt at 160 per cent of GDP by 2020.
All these figures must seem purely academic to many people in Greece who are struggling to survive cuts in pensions, salaries and jobs, and increases in tax, but it is surely the case that only far-reaching social and structural reform and a surge in competitiveness and economic growth will save Greece from descent towards third world status. Some estimate that an actual devaluation, replacing the euro with the drachma, would cut wages by half.
The current year will see a further 4 per cent decline in the Greek economy. Then the “internal devaluation” identified by the Sustainability Analysis, with its squeeze on labour costs and the whole panoply of structural reforms, should be taking effect. The analysis charts a projection for economic growth of 2.3 per cent in 2014 and 2.9 per cent in 2015 (see the blog from Felix Salmon of Reuters, where he also discusses the pros and cons for journalists of publishing complete documents), but delays in achieving privatisations and other measures will further postpone a return to sustainable debt levels.
Commentators and markets have been generally sceptical about the February 21 deal, while accepting that it gives a breathing space for recovery of Europe’s economy and strengthening of banks’ and governments’ creditworthiness. In the end it will be Greece’s own efforts in transforming its economy which will determine whether this deal can work.
Like this:
Fierce troika attack on Greek labour costs
Devaluation was invariably the path to survival for weaker European economies in the days before the euro. But when devaluation is no longer an option, there is evidently no choice for failing economies but to squeeze public spending and slash labour costs in the hope of paying off debt and restoring competitiveness.
A striking aspect of the Greek case is the attack by the troika of ECB, IMF and European Commission on wages and non-wage costs in Greece’s private sector. This also means an attack on Greek trade unions, which have always been extremely powerful players. I well recall a meeting with the CEO of a major firm in Athens which was having trouble with Brussels, and being told that the union chief had his office just down the corridor. That was a big problem for the client!
The negotiations over recent weeks have shown just how tough is the new reality. The Athens talks have demonstrated a fierce determination by the troika to force a transformation in the Greek economy.
The deal now approved by Athens imposes a range of measures which, according to Athens News includes cutting the minimum wage by 22 per cent plus a further 10 per cent for young workers, a freeze in basic wages until 2015, a reduction in pension provisions (still to be finalised), lower social contributions and elimination of the 13th and 14th months’ salary to which private sector workers are entitled. A further reduction of 15,000 people in state employment will be required this year as part of a longer term cut of 150,000 and another €300m of budget cuts as yet unspecified. The scope of the troika’s demands will not be lost on other peripheral eurozone countries.
The troika negotiators are taking nothing on trust. Greece’s main political parties have been obliged to commit themselves to the deal as a condition of receiving the €130bn bailout in advance of April elections. Antonis Samaras, who leads the New Democracy party, was holding out, but all the main parties have now signed. Finance minister Evangelos Venizelos headed to Brussels today in the hope of striking an agreement with the eurogroup.
The German idea of putting a Brussels-based manager in charge of the Greek economy may have been a humiliation too far for Greek sensitivities, but the requirement to channel bail-out funds into an escrow account to ensure that interest on the loans will be paid on time would effectively amount to external control of budget management.
When is a default not a default? When Greece keeps the euro, I suppose. After difficult negotiations with the banks and others there does appear to be agreement on the haircut for private sector debt, with the writing off of 70 per cent of the face value of Greek bonds and an interest rate of 3.5 per cent on replacement paper. As part of the final agreement it seems that ECB president Mario Draghi has said that the ECB will agree to forego the face value of the €40bn of bonds which it acquired at a knock-down price last year, knocking a further €10bn or so off the Greek debt mountain.
So the price to be paid for Greece to remain in the eurozone is high indeed. There is no doubting the suffering faced by the Greek people. The bitter truth is that the alternative of all-out default and quitting the euro could be even worse. The test will be whether a real reduction in labour costs and a freeing-up of the economy will provide sufficient stimulus for Greece to climb out of the abyss.
An accountant friend of mine has proposed a simple solution to the crisis: Give all we other Europeans a voucher for two weeks’ holiday in Greece. That should get the Greek economy moving again!
Consequences of Britain’s summit veto
It’s too early to gauge the real impact of David Cameron’s veto at the European Council in the early hours of December 9 and the decision of 26 countries to devise a new treaty, but there have been straws in the wind over recent days which indicate how positions are evolving and which will set the agenda for 2012.
One consequence of Cameron’s self-imposed isolation in Brussels has been a surge in articles and interviews arguing for Britain’s full engagement with Europe. We’ve seen nothing like it for years. The nicely-named “Atlantis” strategy, whereby Britain takes the eurosceptic route, “repatriating” major elements of EU legislation, quitting key parts of Europe’s decision-making process and becoming (as some British eurosceptic MPs have advocated) like Norway or Switzerland, has been widely exposed as a recipe for decline. See for instance Timothy Garton Ash’s Guardian article.
One long-term consequence of the UK position could be to encourage the break-up of the United Kingdom. Scotland’s first minister Alex Salmond has already questioned whether Scottish interests will be adequately protected, given the UK’s isolation, reflecting the fact that the Scottish National Party has always seen the future of an independent Scotland as a committed member of the EU. The SNP plans a referendum on independence in 2014 or 2015 where the protection of Scotland’s interests will no doubt figure.
British public opinion has been broadly in favour of the Cameron stance and even puts the Conservative Party ahead of Labour, which is no mean feat in these times of austerity, but those questioned in the YouGov poll showed some popular concern over the economic impact.
As for Britain’s EU partners, Chancellor Merkel’s conciliatory speech in the Bundestag after the summit was a helpful start. She stressed Britain’s role in Europe and so provided some comfort to the British prime minister. This contrasted with President Sarkozy’s attack on Britain’s obsession with the single market which was followed by a stream of criticism about the British economy from various French notables, including the head of the French central bank – further evidence that Anglo-Saxon financial services are seen as the ultimate villain behind the present crisis, and also a sign of the tensions within the Franco-German alliance.
That said, there is no doubting the distress that has been caused among several member states by the UK opt-out. Ireland was quick to promise intensive bilateral talks with London to avoid British isolation and agree common agendas.
There has been some back-tracking and some reassurance. Prime Minister Cameron and Chancellor George Osborne said immediately after the Council that the British veto would prevent the European Court and the Commission being used for implementation of the “fiscal compact”, but after a weekend’s reflection Mr Cameron had “an open mind” on the subject. The lawyers had ruled that the EU institutions could be used, under Articles 121, 126, 136 and 273 of the existing Treaty.
Britain’s draft protocol, presented in the early hours of December 9 to give treaty protection for UK financial services, would have demanded the right for the UK to adopt banking laws which were stricter than provided under EU financial services legislation. It seems there was no need to worry though: Commissioner Michel Barnier has since said that the Vickers report, requiring enhanced levels of bank capital, can be applied to meet the UK’s special situation.
In a previous blog I suggested that David Cameron’s prime motivation for exercising the veto in the small hours of December 9 was to satisfy the eurosceptics in his own party and avert a referendum. I have since been told that he said to Barroso and Van Rompuy during bilateral meetings that his job was indeed on the line. One can only draw the conclusion that the British prime minister found himself trapped by political calculation at home and diplomatic isolation abroad, leaving him little choice but to act as he did.
