EU cash must boost midterm prospects

Foreign economists say Greece needs to use the cash it will get from the European Commission’s Recovery Fund to strengthen the healthcare and education systems, implement investments and growth policies, cut taxes, support entrepreneurship and contain the rebound of unemployment. They tell Kathimerini that the almost 32 billion euros will give Greece a significant opportunity to improve its economy’s midterm prospects.

According to estimates by Oxford Economics, if Greece makes the most of those funds, it will outperform the eurozone with annual growth exceeding 3.5% in 2021-24.

Holger Schmieding, chief economist at Berenberg Bank, says: “The recovery fund is meant for the recovery after the pandemic, not for covering the costs of the pandemic this year (except for a very small part dedicated to 2020). Like other countries, Greece should use the grants and cheap loans from the fund from 2021 onwards to strengthen its medical system further, for other investments and for covering the social costs of the pandemic and the resulting rise in unemployment in the next few years. Ideally, Greece would also use part of the money to cut corporate taxes and make the country more attractive for inward investment.

“To help with the costs for 2020, Greece should ask for a credit line from the ESM. It would be much cheaper than to borrow the money from the market. Greece should use the cost savings for some additional targeted measures in 2020 to help people most affected by the pandemic and the current recession. Taking money from the ESM has a “stigma” effect. But as it would not involve any troika-style conditions, it would be good to take the cheap loans,” he argues.

Bruegel Senior Fellow Zsolt Darvas also argues in favor of Greece tapping the European Stability Mechanism credit line: “Given that Greece already has a lot of ESM loans and interest rates on Greek bonds are significantly higher than the ESM interest rates (which will be near zero), it would be sensible for Greece to apply for the ESM credit line,” he notes.

“The reason why other countries have not applied is a stigma effect: applying for an ESM loan could signal that the country has weak public finances. Other countries face lower in interest rate, so the interest saving form an ESM loan would be small. Moreover, pandemic-related healthcare costs so far have been well below 1% of GDP, while this credit line can be spent only on that, so other countries might not find it worthwhile to borrow from the ESM for is minuscule interest saving,” says Darvas.

Meanwhile, Melanie Debono, a Europe economist at Capital Economics, would opt for bonds: “The ESM credit lines are loans rather than grants and are therefore less attractive at the moment given how far bond yields have fallen (there is a saving because the ESM interest rate will be so low, but the saving is small). Also the credit lines are fairly small at a maximum of 2% of GDP for each country, and the ESM itself is politically unattractive because of its association with past conditionality.”

Raffaella Tenconi, founder of Ada Economics and chief economist at Wood & Co, agrees, saying she does not see merit in applying for an ESM credit line for a country that is in such a strong funding position as Greece: “Savings in terms of funding costs are minor and it would make more sense to spend the energies trying to rebuild the trust of Greek citizens in Greek bonds. It is a worth while investment for the long term.”

Optimum use of the €32 billion is essential: “I think if you are going to use these funds, use them for funding things that would really help in the long term and wouldn’t be really viable in any other way: better funding for maternity and education: that is, broader maternity and paternity leave coverage, greater kindergarten support, better life long education services, better education services for the compulsory years. And in support of entrepreneurship: lower tax burden for start ups and smaller companies in their first 6 years of operations,” she says.

For Sebastien Galy, Senior Macro Strategist Nordea Asset Management, the EU cash is a political vicotiry for countries like Greece, that ought to make the most of it: “The proposal from the EU Commission is likely to meet significant resistance as they largely expect so that the size is likely to fall from €750 billion to €500 billion at a guess giving a victory to a group of countries. Having the funds eventually available means that Greece can more easily borrow funds in the market as the market won’t care much about the delay which then drives funding costs. That means better economic activity in 2021 and especially in it second half and hence rising tax revenue,” he tells Kathimerini.

“The decision to allocate the funds is a political one and driven by a sense of emergency. It is only in a year or so that the market and Northern Europe will start to focus on their ability to lead to reform that would increase productivity.

“As important as all of this is the sense that as dysfunctional as the European Union is, it does have a safety net that doesn’t depend only on the ECB and that has a huge impact on the psychology of households and corporates in Greece. It is very unlikely that Greece heads for the ESM given the stigma that is attached to it. The ‘problem-child’ in Europe this time around is Italy and it is doing better now than many would have expected,” argues Galy.