Published in New Europe, MARCH 15, 2016
During the economic crisis, which erupted in May 2010 and continues to date, several pundits and commentators have remarked that Greece has found itself “at a crossroads.” Such characterizations reflected turning points in Greece’s relationship with its international creditors, undue delays in the completion of planned reviews of the adjustment program, or serious political developments such as the SYRIZA-led coalition’s rise to power in January 2015.
Whether all incidents termed as “crossroads” deserved that label is debatable, although most of them were serious enough to have attracted special attention by analysts and the media. They all had one important common characteristic, though: the implications were mainly economic and the analyses focused on the economic consequences for Greece and, often, Europe.
Now, however, Greece has truly reached an undeniable crossroads. The migrant crisis that began a few months ago and continues to date has put Greece at the cross-section of economics and politics. Decisions that are about to be taken by Greece and its European partners will affect not only the economic future of Greece but also the political future of Europe.
Today, therefore, the fundamental question is, how would Greece’s international creditors address the existing economic crisis cum the unfolding migrant calamity? Would they bundle them? Would they separate them? How would they prioritize them? Moreover, what would be the corresponding role of the IMF and Greece’s European partners in the emerging reality?
Currently, the IMF is not a partner in the third bailout agreement that was signed between Greece and the ESM in August 2015, and has set two unequivocal conditions for returning to the program:
First, the completion of the first review of the August agreement, which was supposed to have been completed by November 2015 and is still ongoing.
Second, the provision of adequate debt relief to Greece by its European partners on their earlier loans so as to make Greece’s debt sustainable after 2022 and in the foreseeable future thereafter (since June 2015 the IMF has considered the debt sustainable if the country’s gross financing needs do not exceed 15% of GDP). Greece’s European partners have agreed, in principle, to provide debt relief, but will not begin discussions on the matter before the completion of the first review.
Therefore, both lenders converge on the completion of the first review (which includes tough reforms of the pension system, the tax system, the regime of NPLs, etc.) as a prerequisite for the next step. But the first review also includes a series of measures to close the estimated fiscal gap until 2018, and there is an apparent disagreement among Greece and its two creditors (and between the latter) about the size of the gap. Where does this leave the IMF?
Here is where the political dimension of the refugee problem begins to intersect with the economic dimension of the Greek crisis. If the IMF cannot, because of its rules, show enough flexibility to align with the numbers of the Greek government and the European creditors (these numbers at some point will be similar but lower than those of the IMF), it may remain an observer from the sidelines until either the numbers “add up” or Greece permanently severs its lending relationship with it. And how could that happen? It could happen if the core European partners, notably Germany, do not set the involvement of the IMF as a condition for the continuation of the ESM-supported program. Such a change of direction by the core Eurozone countries would reflect the recognition of a new reality, namely that the risks for a Eurozone “accident” are higher due to the migration crisis than the Greek economic crisis.
It would, therefore, reflect a conscious decision to support Greece through humanitarian and other assistance related to the migrant crisis and let things run their course in a less structured manner regarding the economic reforms and the fiscal adjustment. Resources would be provided to Greece under the current ESM–supported program essentially to repay upcoming debt obligations with little additional budget support, while the IMF would play, at best, the role of a technical advisor. At the same time, the promised additional debt relief would be considered along the lines of the IMF recommendations, but it would not affect the liquidity in the banking system before 2022.
How likely is this scenario? It is hard to predict, but it is certainly not as remote as it seemed a few months ago. Such a fundamental reassessment would reflect an appreciation that, after six years of economic supervision by European creditors and the IMF, the Eurozone’s economic future is largely independent from that of Greece. The threat of systemic implications from a possible Greece default has become remote and, in strictly economic terms, the concern of the core Eurozone powers is not whether Greece could be the source of contagion but whether taxpayers’ money should continue to flow into the country just to keep it afloat within the Eurozone.
On the other hand, Greece’s political future, as determined by the migrant crisis, has serious potential implications for the cohesion of Europe as a whole; a collapse of the Schengen Agreement, for example, could unravel the dream of common European borders within weeks.
A decision to relax the requirement of IMF participation under the ESM program would be a fundamental change in the implicit relationship between the Eurozone and the IMF; it would come full circle to the early stages of the Greek crisis (winter-spring 2010) when several European decision-makers were wary of the involvement of the IMF in a Eurozone country. It would also signal the end of any future participation by the IMF in bailout programs of the Eurozone and, perhaps, other Regional Financing Arrangements.