“This volte-face in the country’s fortunes showed once again not only the government’s poor understanding of economic reality, let alone its handling, but it reminded everybody of its propensity to distort the real situation for political gain”
Early last month, Greece’s radical left SYRIZA party, which leads a wobbling left- right coalition, celebrated two years in power and its leader Prime Minister Alexis Tsipras appeared ebullient that his government had managed to put the country back on an economic growth path. At least that was the picture emulating from reading early new year statistics of the country’s economic performance in the last quarter of 2016, which showed a fragile GDP growth of 0.3%.
Seen in context with the mediocre but positive performance of the previous two quarters. one could easily come to the conclusion that economic recovery was at last in sight.
However, for anyone living and working in Greece today it is more than obvious that the economy, far from expanding, remains in tatters with businesses and households having real trouble meeting monthly payments, with unemployment rampant, especially among young professionals, running at 25% - having showed a modest decrease from 27.5% in 2017, but still being highest among EU and OECD countries.
So it came as no surprise when the independent Hellenic Statistical Authority (ELSTAT) in announcing the official statistics for the fourth quarter of 2016 on March 6 revealed that the economy had in fact contracted by 0.4%, rather than exhibiting the “robust growth” that the government was busy touting until then. This volte-face in the country’s fortunes showed once again not only the government’s poor understanding of economic reality, let alone its handling, but it reminded everybody of its propensity to distort the real situation for political gain.
Today, the Greek government finds itself trapped between the pressure being exerted on the Greek economy by the drawn-out negotiations over the second review and the political cost of a painful compromise with the country’s lenders.
“The prolonged negotiations with official creditors to conclude the second review of Greece’s third bailout increasingly resemble the catastrophic standoff with creditors in the first half of 2015 that led the country to the brink of Grexit. Back then, the newly elected radical left government led by Prime Minister Tsipras confronted creditors with demands for debt write-offs and an end to austerity”, said Miranda Xafa, a well known economist in the latest Policy Brief for the Centre of International Governance Innovation.
As political analysts point out, it has become clear to the premier and his advisers, especially after the gross domestic product data published last week, that the longer the review drags on, the less the chances of a strong economic recovery this year. At the same time, though, the prime minister is aware that there are several issues pending on the negotiating table that he is not in a position to accept because of the lack of support from his party and MPs in particular.
According to well informed business sources, the government has yet to agree with the lenders the full extent of the extra fiscal measures it will have to adopt. Discussions have centered on 2% of GDP, or 3.6 billion euros, in new interventions, but Athens is hoping to bring that number down, especially given the strong fiscal performance last year.
As reported in the press, there is an agreement that one of the new fiscal measures will be the reduction of the tax-free threshold for personal incomes, which is due to be brought down to 5,900 euros from 2019, and will account for 1% of GDP. The lenders, especially the IMF, are most insistent on the need to lower the tax-free threshold since 50% of Greece’s population appears exempt from paying taxes.
Yet, another area of contention is the further reduction in pension spending, together with the issue of labour reforms, which appears to be a stumbling block in the current negotiations. The IMF does not want any changes made to labour legislation, even though the government is keen to bring back collective bargaining across the board. The IMF does, however, want changes to the laws governing strike action so as to ensure that those are approved by a majority of 51% of workers and not just by militant trade unionists, as is the practice today. It also wants companies to be able to make decisions on mass dismissals without the intervention of the Labour Ministry, as it happens today.
A Greek government official, as quoted by daily Kathimerini, who is taking part in the negotiations, said the goal of the Greek side is for only a couple of unresolved issues to remain on the table by March 20, when eurozone finance ministers are due to meet in Brussels. He said this would help Greece’s efforts to reach a “respectable” compromise and avoid delays that work against the country’s interests.
However, market sources and executives of large foreign companies resident in Athens which follow closely the current negotiations, remain highly skeptical especially after the latest round of inconclusive bailout talks held in Athens last week. These executives dismiss as pure political posturing Tsipras’s latest statement when, in comments to reporters, at the end of a summit of European Union leaders in Brussels, he said he believed a technical-level agreement could still be reached in time for a March 20 Eurogroup, with a broader accord, including the specification of mediumterm debt relief measures, in April.
“A sliver of progress has been achieved in Greece’s bailout review negotiations over the last two weeks”, note Brussels based analysts who follow closely Greece’s economy, suggesting that the Greek debt saga may not end in tragedy after all. They further observe that the government’s agreement to implement IMF-mandated reforms including lowering the threshold of tax-free income and amending the pension system is a major departure which helped unblock a rather stagnant situation.
In a latest report on Greece, Focus Economics said, “These measures are a large climb-down by Prime Minister Alexis Tsipras as they had previously been red-lines for the government, but are a step in the right direction towards a successful bailout review. While the latest agreement signals some progress, a number of hurdles shall remain before the country obtains access to fresh funds and the IMF has still not signed on to the third bailout — a key requirement from the country’s European lenders. Meanwhile, recent economic data show that the economy is on a weak footing: growth stalled in Q4 2016”.