With review completion in sight, which way next for Greece?

Agora Contributors: Nick Malkoutzis, Yiannis Mouzakis
Photo by Harry van Versendaal
Photo by Harry van Versendaal

Barring any major last-minute surprises, Greece and its lenders should conclude the first review of the country’s third bailout in the next few days. It will most probably be the result of an unsatisfying fudge on all sides but, then again, when has it ever been any different during the Greek crisis?

The question now is what lies ahead for Greece in political and economic terms once the review has been concluded. Broadly speaking, there are two paths: The relatively smooth one and the one that gradually deteriorates before becoming impassable.

Under the best-case scenario, the stability and bailout funds that would flow from an agreement (possibly at the May 24 Eurogroup) would provide the current government with a platform on which to build and the economy with some much-needed momentum to get it out of the mire created by last year’s prolonged uncertainty.

Greece has not received any programme funding since December and is in line to get at least 5.7 billion euros that is overdue, with potentially more coming in to allow the government to reduce its arrears, which have reached almost 7 billion. The benefits for the Greek economy of this money coming in, as well as a sense of stability returning ahead of another possible record tourism season, are as significant as they are obvious.

Prime Minister Alexis Tsipras could find himself looking over a much improved economic landscape this autumn, compared to the ravaged scenery of last September.

This could also benefit him on the political front, especially given the remarkable cohesion that his coalition has shown over the last few months. Since the vote on bailout measures in December, public dissent within SYRIZA has been at a relative minimum.

Apart from one testosterone-fuelled threat by Defence Minister Panos Kammenos to walk out over a reference by Migration Minister Yiannis Mouzalas to “Macedonia” rather than the Former Yugoslav Republic of Macedonia, coalition partner Independent Greeks (ANEL) has also shown no intention to rock the boat. The fact that none of ANEL’s nine MPs chose to speak during the recent parliamentary debate on the pension and income tax reforms – worth 2 percent of GDP – but all voted for the bill underlines the party’s role as the silent partner in the government, willing to go along with almost anything.

The fact is that after that vote, the coalition has done most of its heavy lifting for the time being. The 1 percent of GDP in further fiscal measures (mostly rises in indirect taxes) should not pose a problem. There may be some reservations in the government’s ranks over the liberalisation of the non-performing loans (NPL) market, but the short-term protection offered to those with primary residences that have a taxable value of up to 140,000 euros should be enough to ensure that SYRIZA and ANEL lawmakers believe the most vulnerable are protected.

With these measures out of the way, there are no immediate legislative hurdles for the coalition to face. Barring an escalation of the refugee crisis, which could have political consequences, or the outbreak of a crisis within notoriously factional SYRIZA over a non-bailout related issue, there is no reason to believe that the government will hit any walls in the coming months. In the context of the Greek crisis, this could be seen as period of extended calm.

The first disruption to this relative bliss could be the next programme review, which is expected to begin in September/October. This may contain some tricky demands, such as the further liberalisation of the labour market, and will involve the government having to tick off dozens of “prior actions.” However, there has never been a straightforward or swift review of the Greek programme since the first bailout was signed in 2010. There is no reason to expect that the next one will have any more drama, although if the to-and-fro is dragged out it could cause the loss of any momentum gained in the previous months.

A more significant challenge may arrive next April, when the 2016 primary surplus has to be confirmed and the mechanism for contingent measures will have to kick in if the target has been missed. The saving grace here could be that the targets for 2016 are relatively low (recession of 0.3 percent of GDP and primary surplus of 0.5 percent) and within the government’s reach.

If, though, the legislated tax hikes damage economic activity and do not have the expected revenue-raising impact, then the government could find itself having to take corrective action. Given that more than 80 percent of public spending in Greece is on pensions and public sector salaries, any further interventions on the expenditure side are likely to be politically painful. Even more so, given that by that time Greek society will have fully comprehended the implications of the measures that the SYRIZA–ANEL coalition had to adopt following its failed negotiations in 2015.

At this point, the opposition (which is already calling for a change of government) may smell blood and pull out all the stops to make the Tsipras administration’s position untenable. Snap elections may lead to the creation of a more reform-minded Greek government led by New Democracy but it is also likely to be another weak administration in terms of its parliamentary majority given the fragmentation of Greek politics. It will also probably require the formation of a new coalition, raising questions about whether any work will have been done to build a common and lasting understanding between the parties involved.

However, given the low primary surplus target for next year, if one were to look for a more obvious trigger for political developments in the future, it would be later in 2017 or early 2018. Greece is forecast to have growth of 2.7 percent in 2017, which seems incredibly hopeful, while its primary surplus has to reach 1.75 percent, which is equally ambitious.

It may be apparent towards the end of 2017 that these targets are not within reach, while by February 2018 (when all accruals have been accounted for) it could become clear that the fiscal brake will have to be activated, and to achieve a much bigger corrective adjustment (say 0.5 to 1 percent of GDP) than the one that might be called for in 2017.

This could then trigger the previous scenario mentioned, with society reacting angrily to the prospect of more measures and the opposition sensing its chance to precipitate the end of a government whose stamina has been worn down by the rigours of implementing significant fiscal adjustment.

So, if we are heading for a period of calm in the Greek crisis, it may be a good idea to enjoy it while it last because – as the saying goes – it rarely does.

*An earlier version of this article appeared in last week's e-newsletter, which is available to subscribers. More information about subscriptions is available here.

You can follow Nick and Yiannis on Twitter: @NickMalkoutzis & @YiannisMouzakis

 

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