And so Greece and the rest of Europe are moving towards a deal to
keep Greece out of default and Greek banks from running out of cash. The
new Greek prime minister, Alexis Tsipras, appears to be climbing down
from his promises to stop letting foreign creditors dictate Greek
economic policy.
What’s not clear yet is just how far
Tsipras is willing to climb down, and how much other European
governments will demand of him. Although this is a strong signal that
the two sides will make a short-term deal, it’s only a tentative
agreement. Before an actual deal can be struck to
continue rolling over Greece’s maturing debts and holding
open the central bank credit lines to Greek banks that keep them liquid
in euros, Greece’s troika of official creditors must still review and
approve a preliminary fiscal plan that Tsipras is supposed to produce
before midnight on Monday.
To continue receiving support in May and
June, the Greek government must win approval of a more detailed fiscal
plan, and to continue getting aid after that, the Greek government must
agree a new adjustment program.
The component of the
tentative deal that has received the most attention is that European
governments will back off from their previous expectation that Greece
would run a 3% of GDP primary surplus this year. A statement issued by
the Eurogroup after its meeting on Friday said creditors will adjust the
target to “take the economic circumstances into account.”
But
Greece has been allowed to miss fiscal targets due to
worse-than-forecast economic performance every year since 2010, and this
year would have been no exception even if the previous government of
Antonis Samaras had stayed in power. The target was premised on forecasts
of 2.9% real GDP growth and 3.3% nominal GDP growth, which were very
optimistic even before the recent collapse of Greece’s package-tour
sales to Russia.
As I’ve written,
the real test for Greece is whether it can get its fiscal balance back
to where it was in January-November of last year, before tax collections plummeted
during the election campaign. This tentative deal gives the new Greek
government some breathing room, but it sets up a tight schedule for
Tsipras to put forward acceptable fiscal plans.
Predicting
what Tsipras will do is difficult because he is telling one thing to
European leaders and another thing to Greek audiences. In a televised appearance
on Friday, he said Greece “took a decisive step, leaving austerity, the
bailouts and the troika,” but “won a battle, not the war. The
difficulties, the real difficulties ... are ahead of us.” But according
to the Eurogroup, Tsipras agreed to continue giving the troika a veto
over Greek fiscal policies. As the statement put it, “the Greek
authorities commit to refrain from any rollback of measures and
unilateral changes to the policies and structural reforms that would
negatively impact fiscal targets, economic recovery or financial
stability, as assessed by the institutions.”
The
Eurogroup however made a small, symbolic concession by referring to the
troika throughout its statement as “the institutions,” apparently to
help Tsipras pretend he wasn’t breaking a campaign pledge not to
cooperate with them.
As for the details of the fiscal
plan, the Eurogroup statement made it sound like governments
would let the troika’s permanent mission in Athens decide whether
they’re credible. It said the preliminary fiscal plan would be reviewed
“on the basis of the conditions in the current arrangement” – that is,
the latest fiscal plans agreed between the troika and the Samaras
government – but “making best use of the given flexibility which will be
considered jointly with the Greek authorities and the institutions.”
Just how much flexibility the troika mission will be told is “given” is
anybody’s guess. The Greek government’s team in Brussels handed out written comments to journalists after the Friday meeting saying the government would not have to make the tax increases and pension cuts that the former government had promised.
Having made this tentative deal, I
would be surprised if Tsipras can’t come up with a plan credible enough
to convince European governments to roll over debts coming due through
April. But Tsipras has made a lot of populist promises to cut taxes and
roll back budget and salary cuts, which will make it very hard for him
to get back to even a zero primary fiscal balance after January’s
disastrous 20% shortfall of state budget revenues. I doubt the deal will
hold.
Looking at the bigger picture, Greece has
undergone a large and traumatic internal devaluation since 2010, but
it’s still not competitive enough to expect bounce-back growth. It
reported a small amount of real growth last year but nominal GDP still
shrank. There’s little reason to think Greece can rapidly re-employ its
huge numbers of unemployed. Greece is still trapped, unable to get out
of austerity without leaving the euro, but more afraid of leaving the
euro.
Is Tsipras willing to do exactly the opposite of
what he promised? Is he willing to fiscally tighten when he promised to
loosen? He has shown that he’s willing to extend the troika’s veto over
Greek economic policies while claiming on national television to have
parted ways with the troika. We’ll see.
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