Originally Published 2015-07-21 00:00:00 Published on Jul 21, 2015
Greece's problems were inevitable because the concept of Eurozone is based on flawed solidarity. While the monetary policy is controlled by the ECB, the fiscal policy is under the member states. They have to obey the diktat of the ECB regarding interest rates and this has made Greece uncompetitive with rising costs.
Eurozone to blame for Greece's problems

Predictably, Greece remains within the 19 countries' group of the European Union that adopted the euro as their currency in 1999. Most Greeks have enjoyed being in the Eurozone. They have been getting foreign investment and can enjoy German cars, French wines and Italian shoes because of the Single Market which has no tariff barriers. It was because of these attractions that the governor of Bank of Greece falsified its higher fiscal deficit to meet the stringent fiscal deficit requirement of the Eurozone at 3 per cent in 2000. Subsequent Greek governments did nothing to improve the fiscal situation and the country was in deep trouble by 2010. The Greek government could not also control widespread tax evasion, corruption and catered to populist demands for wage hikes and higher pensions.

Greece had to borrow money from the Troika comprising the IMF, European Commission and the European Central Bank. Other big lenders were Germany, contributing 57 billion Euros, and France 43 billion euros. Already the Troika has given two bailouts worth 240 billion euros.

Things hotted up since 2012 and nearly all Greece's bondholders exchanged their securities for bonds of diminished value, thus taking 'haircuts'. The old bonds received haircuts of up to 65 per cent, knocking 107 billion off their face value. Later that year, the Eurozone lenders also agreed to extend their own timeline for repayment by 15 years and defer interest for a decade.

The capital mistake of the Troika was that it imposed harsher and harsher austerity measures which crippled Greece's growth. It led to 27 per cent unemployment among the labour force. Fifty per cent of the youth were jobless. There were many suicides. The Greek government and the people resented the austerity measures which did not seem to work and the Greek economy shrank by 25 per cent. But in 2015, Greece started showing some positive signs and 2.5 per cent GDP growth has been predicted by the IMF. The general government deficit is projected to fall to 0.8 per cent of the GDP in 2015.

Crippled by the austerity measures, Greeks chose a Leftist government with Alexis Tsipras as the Prime minister, who said recently after signing the bailout deal, that "I take on the responsibility of signing a document I don't believe in". The new bailout programme has three years' duration (not like the 5 month previous ones) and guarantees substantial money that will cover Greece's short- term needs, including recapitalisation of banks. It will give 35 billion Euros for investment and it includes a commitment for debt restructuring in the future.

The package of 86 billion euros that has been worked out, however, has sterner austerity measures and will go towards paying the debt to the creditors like the IMF. But Greece owes more than 323 billion euros to its creditors which is 175 per cent of its GDP. Surprisingly, the IMF recently (on 15th July) announced that it would not be able to disburse 16.4 billion euros from its own funds unless an agreement on debt relief is concluded. The IMF's current programme for Greek debt expires on March 2016, but under its rules, it is not allowed to participate in a bailout if a country's debt is deemed unsustainable and there is no prospect of it returning to private bond markets for financing. Thus IMF is making it clear that if Germany wants to remain on board, then Berlin will have to make room for significant debt relief.

Without IMF, the bailout of 86 billion euros is not possible because the European Stability Mechanism of the Eurozone, which has 500 billion euro bailout fund, was expected to put up only 40 to 50 billion euros. The IMF has suggested a very dramatic extension of repayment plans with a grace period of another 30 years on the entire stock of European debt, meaning Greece would not make a single interest or principal payment on Eurozone loans until 2053. It already has such a grace period until 2023. Alternatively, Eurozone creditors would have to make annual transfers to the Greek Budget meaning Eurozone grants to Athens "deep upfront haircuts." IMF has been very soft on Greece!

Perhaps Greece's problems were inevitable because the whole concept of Eurozone is based on flawed solidarity. While the monetary policy is controlled by the ECB, the fiscal policy is under the member states. They have to obey the diktat of the ECB regarding interest rates and cannot tinker with the exchange rate to promote exports or investments. Because of these controls, Greece became uncompetitive with rising costs and yet was bound by the Euro. As a result, the Greek economy's manufacturing and GDP growth declined sharply.

Greece will have to pledge its national assets for $50billion as security under the new bailout package -- a humiliating compromise. As former Finance Minister Yanis Varoufakis said, the new bailout is 'like a new treaty of Versailles, a coup d' etat, which used banks instead of tanks.'

In any case, Greece being only a small though outstanding part of the giant EU, stands to gain by remaining within the Eurozone and it could be instrumental in shaking up the policy of the Troika which has been controlling the Eurozone countries since 2001. In the future, a lot more autonomy will have to be given to member countries in adjusting to adverse situations. Weaker states will have to get money transfers from the ECB and the European Commission, otherwise the union cannot last.

Hopefully Greece's economy will pick up once investments come in. As Alexis Tsipras rightly said "The hard truth is-- this one way street for Greece was imposed on us."

Thus not only Greece capitulated but the IMF and all members of the EU came forward to support it. Even the tough German Foreign Minister Wolfgang Schauble has acknowledged that Greece needs debt relief. As Donald Tusk, head of the European Council warned, it was not only the financial but political conditions which had become volatile and similar to the revolutionary atmosphere of 1968 Europe. By granting Greece concessions, EU's own survival has been guaranteed.

(The writer is a Senior Fellow at Observer Research Foundation, Delhi)

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David Rusnok

David Rusnok

David Rusnok Researcher Strengthening National Climate Policy Implementation (SNAPFI) project DIW Germany

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