CON­TEM­PLA­TIVE EAS­ING

Greece is out of the fry­ing pan of its sovereign debt cri­sis, but both it and the EU must avoid the fire ahead

Beijing Review - - COVER STORY - By Dong Yi­fan

OThe au­thor is an as­sis­tant re­searcher with the China In­sti­tutes of Con­tem­po­rary In­ter­na­tional Re­la­tions n Au­gust 20, Greece for­mally ex­ited the in­ter­na­tional fi­nan­cial res­cue pro­grams in­tro­duced by the Eu­ro­pean Union (EU), bring­ing tem­po­rary respite to the de­struc­tion caused by the Eu­ro­pean debt cri­sis to Greece’s econ­omy. This is good news for the economies of the euro zone in 2018, and the EU author­ity wasted no time in com­mend­ing Greece for the achieve­ments of its eco­nomic re­cov­ery and struc­tural re­form.

Eu­ro­pean Com­mis­sion (EC) Pres­i­dent Jean-claude Juncker hailed that the con­clu­sion of the sta­bil­ity sup­port pro­gram marks an im­por­tant mo­ment for Greece and Europe, call­ing it a “new chap­ter” in the coun­try’s “sto­ried his­tory.” EU Eco­nomic Af­fairs Com­mis­sioner Pierre Moscovici was also full of praise, stress­ing that Greece has turned the page to be­come a “nor­mal” mem­ber of the sin­gle cur­rency.

Turn­ing the page

The eco­nomic sit­u­a­tion in Greece has gen­er­ally im­proved. The Greek econ­omy grew by 1.4 per­cent in 2017, re­turn­ing to nor­mal lev­els af­ter re­ces­sions in 2015 and 2016. Fis­cal sur­plus was 0.6 per­cent in 2016 and 0.8 per­cent in 2017, while the un­em­ploy­ment rate has been in de­cline since 2013. Mean­while, the rul­ing Syriza coali­tion, which led a ref­er­en­dum on the bailout deal in 2015, has proven a steady hand at the helm of the govern­ment.

Among the PIIGS (Por­tu­gal, Italy, Ire­land, Greece and Spain) coun­tries af­fected most by the Eu­ro­pean debt cri­sis, the economies of Spain and Ire­land have al­ready re­turned to a trend of ro­bust growth. Ire­land was even dubbed the Celtic Tiger be­tween 2014 and 2015 for its strong re­cov­ery, turn­ing it­self into a model for boost­ing com­pet­i­tive­ness and mar­ket vi­tal­ity within the EU. Italy and Por­tu­gal showed no fur­ther sig­nif­i­cant risk ex­po­sure de­spite sim­i­lar con­cerns ex­ist­ing over their pub­lic debt ra­tios and de­te­ri­o­rat­ing bank­ing con­di­tions. Greece, the first coun­try to be bailed out and the coun­try with the heav­i­est pub­lic debt, has fi­nally emerged from eight years of bailout pro­grams, demon­strat­ing that for now, it does not need to rely on for­eign aid to sup­port the sus­tain­able de­vel­op­ment of its own fi­nance and pub­lic debt, an im­por­tant sig­nal that the debt cri­sis is at an end.

Eu­ro­pean fis­cal and fi­nan­cial gov­er­nance struc­tures have also been im­proved amid Greece’s bailouts, grad­u­ally set­ting up a risk con­trol net­work for euro zone coun­tries. Since the debt cri­sis flared up, risk ex­po­sure in coun­tries such as Greece far ex­ceeded fis­cal rev­enue, and the mar­ket credit of pe­riph­eral euro zone coun­tries was thus ques­tioned. In­vestors even pre­dicted that the pos­si­ble debt de­fault of these coun­tries might even­tu­ally en­dan­ger the euro’s credit and thus heav­ily in­debted euro zone mem­bers with­out bailout mech­a­nisms in place were di­rectly ex­posed to the spec­u­la­tion of fi­nan­cial mar­kets.

As a re­sult, a mas­sive cri­sis de­vel­oped only a few months af­ter the emer­gence of Greece’s debt prob­lem. The euro zone, af­ter draw­ing on these lessons, ac­tively ex­plored ways to es­tab­lish a mu­tu­ally sup­port­ive debt-so­lu­tion frame­work in the early stages of the cri­sis.

In May 2010, the 17 euro zone coun­tries jointly es­tab­lished the Eu­ro­pean Fi­nan­cial Sta­bil­ity Fa­cil­ity (EFSF), which, with the sup­port of the Ger­man debt man­age­ment author­ity, was able to raise funds through bonds and other fi­nanc­ing meth­ods to pur­chase the sovereign debt of euro zone mem­ber coun­tries, so as to build mar­ket con­fi­dence in euro zone debt. In Oc­to­ber 2012, the EFSF was trans­formed into the Eu­ro­pean Sta­bil­ity Mech­a­nism (ESM) with the sup­port of euro zone mem­bers, up­grad­ing from a tem­po­rary or­ga­ni­za­tion to an im­por­tant in­sti­tu­tion of the EU to en­hance the fis­cal and fi­nan­cial gov­er­nance of the zone.

The fund­ing sources of the ESM in­clude both the EU bud­get and the debt guar­an­tees pledged by euro zone coun­tries based on their eco­nomic size, which now stands at nearly €700 bil­lion ($811 bil­lion). Timely in­ter­ven­tion and a will­ing­ness to share the risks of euro zone mem­bers makes the ESM an im­por­tant mech­a­nism to elim­i­nate con­cern over risk con­trol and avoid un­nec­es­sary losses in any coun­try where a debt cri­sis is emerg­ing. In the fu­ture, the ESM will sup­port the fi­nan­cial sta­tus of euro zone coun­tries, and the risk of crises will be greatly re­duced.

EU lead­ers hailed the suc­cess of Greece’s exit from the bailout plan, mainly to em­pha­size that EU gov­er­nance in the Eu­ro­pean debt cri­sis and its struc­tural re­form had achieved tangible re­sults. Greece’s trans­for­ma­tion is of sym­bolic sig­nif­i­cance for the EU, which faces mul­ti­ple chal­lenges both in­ter­nally and ex­ter­nally to its gov­ern­ing author­ity.

At the same time, the con­struc­tion of the euro zone’s gov­er­nance mech­a­nism, as well as the Eu­ro­pean Cen­tral Bank’s (ECB) quan­ti­ta­tive eas­ing pol­icy adopted at the be­gin­ning of 2015, have con­trib­uted to im­prov­ing the eco­nomic fun­da­men­tals of the euro zone. As a joint re­sult of global eco­nomic growth and an­ti­cri­sis mea­sures, the euro zone has emerged from re­ces­sion, achiev­ing its goal of restor­ing eco­nomic ca­pac­ity to pre-cri­sis lev­els in 2017. Greece’s exit from the bailouts un­doubt­edly shows that the coun­try and the euro zone are leav­ing both re­ces­sion and cri­sis be­hind.

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