Investment-led Growth, Not More Cuts, Is The Only Way For Greece
Gustav Horn
The agreement reached in Brussels
yesterday between EU governments and Greece came only with a huge loss
of mutual trust. It remains to be seen whether the deal in these
circumstances will win majority political support. Economically, it
would at least offer a small opportunity for a recovery in the Greek
economy. But this would only be the case if the investment elements of
the deal can be implemented swiftly and comprehensively. If the rescue
strategy, on the contrary, remains limited to an even sharper
continuation of government budget cuts this programme will collapse just
like the previous ones.
The dramatic negotiations between EU
heads of government and the Greek government have changed Europe
politically. The mutual harshness of the political arguments, the
tougher and tougher conditions and the huge encroachments on Greece’s
national sovereignty have evaporated mutual trust. We’ll have to wait
and see if Europe can recover from this. We’ll also have to see whether,
given these circumstances, national parliaments can even agree to this
Brussels deal.
From an economic point of view the
agreement is basically welcome even if it’s far from certain that it
will work. It might, at least initially, remove the scenario of Grexit
from the agenda. But this will only stick for the long term if the
agreed measures breathe sustainable new life into the Greek economy.
Given the tough saving conditions imposed this can in no way be
guaranteed. The decisive aspect regarding the effectiveness of the deal
is whether the accumulated burdens via these tough savings conditions
and spending cuts dominate or the investment spurs agreed at the same
time. Only if the latter is the case can Greece retain the prospect of
staying in the Eurozone. For only then can Greece generate the economic
growth that can actually bring about a swift reduction in the size of
its debt mountain.
The fact that the Greek state faced
immediate insolvency and, in the eyes of several actors, this was
acceptable shows how thoughtlessly, nay irresponsibly, this crisis in
the Eurozone has been dealt with in the last few months. And that’s not
just true of Athens.
Monday morning’s deal has, besides many
debilitating aspects, a few positive ones too. The most important is:
It’s finally been acknowledged that Greece can only escape the crisis if
the public purse is allowed to invest again. On the other hand, what we
know of the deal’s details so far is couched in pretty vague terms in
key areas. One example: Greece was entitled in the past few years to EU
investment funding. But it couldn’t call upon the money because this was
tied to co-financing. And the Greek state simply didn’t have that
money.
Set Aside The Obligation For Co-financing Investments
The decisive factor now is whether such
barriers can be lifted in future and Greece can swiftly make real use of
the €35bn investment funding that, willy nilly, is due to it from the
EU Structural Fund. Should that not happen then the nice-sounding
investment pledges will swiftly dissolve in the air and it would be back
to yet more saving that would weaken the Greek economy ever more.
My proposal: For one year only one could give Greece access – without
co-financing – so that the government could kick-start an immediate
investment programme as indeed it must because time presses. The
pre-financing of €1bn through EU funds set out in the deal documents is a
step in the right direction. The fact that Greece can use part of the
– albeit uncertain – proceeds from privatisations for investments can
thus be seen in an equally positive light.
Delays In Emergency Lending Incomprehensible
With the deal, the planned conclusion of
far-reaching pieces of legislation and the handing over of its request
for a new aid programme the Greek government has furthermore let it be
known that it not only intends staying in the Eurozone but sticking to
its rules and regulations. That gives the green light for the ECB to
make an immediate and urgently required rescue measure: Raising
emergency lending to the Greek banking system. Without this step it
would be only a matter of days for the payments system in Greece to
collapse and all further measures other than humanitarian aid would in
the end be in vain. The hesitant attitude of the ECB in this affair is
incomprehensible.
Debt relief is no longer urgent if spurs
to growth prompted by swift investments are in place. Even so, there
would need to be a debt regulation sketching out a credible path to debt
repayment. This is still possible with the agreement as it only rules
out a nominal haircut but not longer maturities for repayment. The Greek
government has committed to a budgetary stance aimed at producing
surpluses excluding interest payments; in other words, the budget would
display a primary surplus. This way the government is preventing future
budgets from being over-loaded with more and more new financial burdens.
But this is insufficient. Secondly, a way must be found to reduce – in a
consequential and haircut-free manner – the debt legacy issues
threatening to strangle Greece to death. Under realistic conditions that
could have been achieved if Greece had been given a year’s grace but
then committed itself to delivering a primary surplus of 2% of GDP for
the next four years. But the current deal obliges the Greek government
to stick to a harsher savings course that is bound to impose further
tough burdens on the Greek economy.
Growth As A Pre-condition For Debt Repayment
Even so, such a binding commitment is
subject to economic risks as the economic situation may turn out worse
than forecast. The agreed debt regulation does not take this into
account. So there is a grave danger that the Greek government may be
forced to make ever more cuts in this serious crisis and the crisis then
gets deeper and deeper. So, the risk of an economic downturn should be
transferred to the schedule of debt repayment. The best way to handle
this would be a prolonged repayment schedule linked to growth. This
would amount to a credible strategy since it assumes dividends through
growth and might even bring about swifter repayment if things work out
particularly well. Such an agreement would put Greece on a credible path
of debt reduction that, in turn, would reduce the risk premia for
private lending to the Greek economy and thus encourage private
investment.
The opportunity for easing future
negotiations would be wasted if Greek debt were parked in its entirety
at the ESM. That would relieve the IMF of its obligations towards Greece
which it already wants shot of because of its own ground-rules. At the
same time, the ECB would also be relieved and could take Greece back
under the protective umbrella of potential sovereign bond purchases
should turbulence return to financial markets. This would have increased
the security of financial investors in buying Greek shares, enabling
Greece very swiftly to return to private capital markets.
Tax Rises And Pension Cuts Are A Drag On The Economy
The agreement includes the rapid
conclusion of long-term, fundamental institutional changes in taxation
law and on the labour market as key elements. It would be sensible to
rebuild the tax authority from the ground up and equip it with reliable
staff. But that wasn’t quite agreed. Instead, tax laws will be altered
in such a manner that the delays associated with making counter-claims
will be significantly hindered and, with VAT, on average higher rates
will be concluded. This would act as a drag on the economy, above all on
consumption. The same holds true for the proposed real-terms cuts in
pensions. Their effect would be socially devastating if not combined
with the simultaneous introduction of basic social security and reliable
health insurance.
The proposed reforms of the labour market remain vague and should focus on current best practice in the Eurozone.
All things taken together, the deal can
offer the prospect of a return to health in the Greek economy only if
its investment elements are taken up swiftly and comprehensively. Only
then, too, will the recapitalisation of the Greek banking system come
into play – and this is where the bulk of the funding on the EU side
will go. Finally, only a dynamic economy can enable banks to undertake
profitable loans.
The institutional changes, either way, can only take
effect over the longer term. A continuation of spending cuts alone would
keep Greece trapped in its crisis. If the new agreements are rejected
then an immediate return to chaos is pre-programmed – with an uncertain
outcome.
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