Five weeks before the 22nd September German elections, German Finance Minister Wolfgang Schauble acknowledged officially that Greece will need a third rescue program in 2014. However, he rejected the possibility of another write-down of Greece’s debt to official creditors. How realistic such a scenario is seems and what does it mean for Greece and lender Germany ahead of elections?
Mr. Schauble's announcement created a political firestorm although it was an open secret that Greece would inevitably need a third aid package. Earlier this summer it became evident that the country's financing needs are only covered up to the end of July 2014 and there is a €4bn financing gap in Greece’s second €172bn bailout.
How much will this third rescue be? According to the IMF not that much since in addition to the €4bn total amount left to fill in 2014, another €6.5bn will be needed in 2015. By 2016, thanks to a growing primary budget surplus, Greece should be able to pay for itself, the IMF estimates. However, a third rescue, even a small one, is nοt going to be easy to pass through the national parliaments of the creditor countries.
Angela Merkel fearing the German voters' exasperation ahead of the elections avoided to answer questions following Mr Schauble's announcement saying that it was too early to talk about new funding. Peer Steinbrück, leader of the opposition party SDP, accused her of concealing the true cost of the Greek aid from German voters until after the national elections. Greece and the cost of its rescue is a hot potato for Ms. Merkel. While her party is almost certain to win in the national parliamentary elections, she is unlikely to win an absolute majority and will need to form a governing coalition, most likely with the Free Democrats (FDP). And any loss of votes could weaken her bargaining position in the new coalition government.
The announcement of another rescue package is undoubtedly important for Greece but it is also important that countries which demonstratedly implement reforms and austerity measures are rewarded with some growth measures that will provide stimulus to the economy
There are three remarkable points in Mr. Schauble's announcement: Firstly, he recognises the progress that has been made by Greece, which is clearly not negligible: Greece reduced its fiscal deficit by 16% of GDP in four years and it is projected to run a surplus next year (IMF). The IMF declared the size of this fiscal adjustment “unprecedented”. Equally remarkable has been the adjustment in the current account, where the deficit has declined by 11.5 percentage points of GDP, during the last four years. However, all these have been achieved at a large social cost as the result of a very intense austerity program: Greece is into a deep recession and unemployment and youth unemployment have reached the very alarming levels of 27% and 60%, respectively (EUROSTAT, July 2013).
A second and more remarkable point is that it is the first time that Mr. Schauble refers to a decrease in the interest rates for Greece without associating it to the measures taken. This is clearly encouraging given the dire greek economic condition described above and the need for lower interest rates. The final remarkable point is that Mr. Schauble firmly rejected the possibility of a second haircut. This of course is understandable ahead of the elections given the fear of the German taxpayers for any further losses. However, it ignores the IMF's warning earlier this summer which referred explicitly to the need for debt relief given that the Greek public debt is now at 160% GDP. The debt grows partly because of the primary deficit, which adds new public debt, and mostly because of the recession. Olli Rehn, European Commissioner for economic and monetary affairs, last Wednesday said that "The debt sustainability can be improved by other means apart from a new haircut such as the extension of the loan periods". But the blunt truth is that a further continuation of the recession through additional rounds of austerity without any growth measures, apart from its other obvious severe socioeconomic effects, will also undermine any attempt of achieving debt sustainability.
The announcement of another rescue package is undoubtedly important for Greece but it is also important that countries which demonstratedly implement reforms and austerity measures are rewarded with some growth measures that will provide stimulus to the economy rather than the current approach of rewarding reforms and measures with more austerity. The Greek economic crisis was mainly the result of national policy failures and mismanagement. However, the EMU's initial problematic structure as well as its inadequate subsequent response to it clearly aggravated it instead of alleviating it. So, in the end it all boils down to deeper integration and the much discussed banking and fiscal union. The only way to effectively address the crisis in the EMU is by a more cohesive, integrated , sustainable, functional and predominantly, true union.