Structural considerations for a prosperous Greece
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No one inside or outside Greece will easily forget 2015. With the change of government and the appointment of Alexis Tsipras from the leftist Syriza party as prime minister in late January, a six-month period of profound uncertainty about the future course of the country only ended when a third financial assistance programme was reluctantly agreed with international creditors in August.
In the course of a confrontational back-and-forth with the troika, the threat of a Grexit from the eurozone became real and eminent. The option of (temporarily) leaving the euro area was only avoided at the last minute of dramatic marathon negotiations in mid-July in Brussels. The events that unfolded during the past 12 months in Greece profoundly challenged the political economy of the country and Greece’s relationship with its European partners.
As the year draws to a close, the business of looking back is fraught with controversial interpretations of what really happened, who was responsible and whether the authorities in Athens, Brussels, Frankfurt, Berlin and Washington have learned any lessons along the way for the year to come.
Some of the key domestic actors in Greece during the first Tsipras government – chief among them former finance minister Yanis Varoufakis – are now engaged in retroactive narrative building. Busy on the international speakers’ circuit and with an unrelenting appetite for media attention, Varoufakis is seeking to underline that the “Athens Spring”, as he calls it, was “crushed” by a combination of the troika institutions, shadowy market forces and his preferred default villain residing in the finance ministry in Berlin.
Yet, this perspective is at odds with numerous facts on the ground in 2015. While Syriza harnessed the protest vote against five years of memorandum policies in Greece, ministers such as Varoufakis or the former energy minister Panayiotis Lafanzanis peddled economic policies based on wishful thinking. Their narrative could also benefit from them taking a deep look into the mirror and asking themselves “where did we go wrong?” instead of automatically pointing the finger at domestic opponents and foreign intervention.
Another look back takes the view that the first six months of 2015 took Greece one step too close to the economic abyss. As the Greek tragedy unfolded, policymakers in Athens could only instigate a narrow escape from this abyss between July and December by performing unprecedented varieties of political “kolotoumbes”. This display of political gymnastics by Syriza is ongoing in numerous policy fields and will also characterize the course of events next year, for example with regard to pension reform, social security regulation and the contentious issue of sovereign debt relief.
In many respects the outlook for Greece in 2016 remains challenging to say the least. The restoration of political trust by the Tsipras government with international creditor institutions and its European partners in essence remains a work in progress. The damage done in the first half of 2015 has created a level of caution and lack of confidence, which has all sides involved emphasizing the need to continue rebuilding, regaining and re-engaging in the political commodity of mutual trust.
What has been damaged once can, in the view of many in Paris, Vienna, Bratislava, Riga and Rome, be repeated. Avoiding any such déjà vu moments is of paramount importance for all parties concerned. But the initiative to deliver in that respect squarely remains in Athens’ court.
Mass unemployment will continue to be the key policy challenge for the Tsipras administration. While he was re-elected in September 2015 on a change agenda emphasizing “alternatives” to the prevailing framework of budget austerity and an ever-expanding list of prior and pending actions, reducing unemployment and creating new jobs (outside tourism) has not featured as a sustainable success story for the prime minister.
The job creation impetus must include domestic commercial banks that are in a position to extend affordable credit to the real economy, in particular to small and private companies. While the recapitalization process of the four largest Greek banks has been successfully accomplished with the participation of international investors, the restructuring process of the domestic lenders is far from complete.
Implementing sustainable solutions to the central liability problem on banks’ balance sheets, namely non-performing loans (NPLs), requires not only legal reform but, equally, a new institutional architecture. This objective includes combating continuous strategic loan defaulting, executing controversial new regulations on house repossessions as well as advancing out-of-court settlement procedures on these matters.
The asset quality of Greece’s major banks’ portfolios remains shaky at best. Credit risks on lenders’ balance sheets remain elevated. But the recovery potential on the liability side is one of the key questions seeking (positive) answers in 2016.
The outlook for 2016 is all the more challenging given that the emerging refugee and migration crises during 2015 have created new policy conditionalities for Greece and its relationship with its European neighbours and partners. The country remains the most important entry point for all kinds of refugees and migrants from different parts of the world. Equally, Greece continues to be a way station for onward transit flows to neighbouring countries and cities further north.
As 2015 has shown, migration to and through Greece cannot be viewed as a problem that can be solved by one country alone. Rather, it constitutes a recurring human reality and tragedy in Greece and beyond that will have to be managed in the course of 2016. Policing the borders with Turkey depends on whether the controversial issue of joint sea patrols with the eastern neighbour can be organized and agreed upon.
On a more positive note, contrary to disturbing electoral developments in many other European Union countries, Greek voters in 2015 did not reject an open-door policy on refugees and migrants. While the country’s national identity has been profoundly challenged through six years of unrelenting economic and social crisis, Greek citizens in their overwhelming majority have not turned against those in need and seeking refuge.
The magnitude of civil society responses and volunteerism towards refugees and migrants on the Aegean islands or at the Idomeni border crossing with the Former Yugoslav Republic of Macedonia (FYROM) has been unprecedented and speaks volumes about the social fabric of Greek society.
By contrast, it is not at all reassuring that the Grexit discussions during the first half of 2015 have gradually been replaced by a new set of threats, namely to suspend Greece’s membership from the passport-free travel area known as the Schengen zone. Such new exit speculation can and must be averted. For the state of play between Greece and its continental partners, however, it speaks volumes that exit threats of a different origin continue to arise on policymaking agendas in Europe.
In conclusion, the jury is still out on the difficult events of 2015 in Greece. The debates are vibrant and frequently polarising. Nevertheless, one heartening political development of recent months has been that the majority of Greek voters in the September 2015 snap elections explicitly rejected the continuation of lunatic economics.
There are lessons to be applied from this observation. The apocalyptic scenario was avoided. A fragile economic recovery is plausible if the politics in Athens do not get in the way again. Whether these lessons can, in the course of 2016, lead to some positive momentum for Greece, its society and economy remains to be seen. One would surely wish for it as this year draws to a close and a New Year dawns on the horizon.
Yes, the banks will play a key role in any economic recovery. Here, Greece faces a phenomenon which I have not seen in any other country as yet: the core of the banking sector (i. e. the four large banks) is majority-owned by foreign hedge funds and other foreign financial investors. I don't know to what extent these owners can directly influence the policies of these banks but it should be noted that the objectives of financial investors are frequently at odds with policies for a sustained, longer-term recovery.