Excluding IMF is no panacea for Greece
The Greek government could barely contain its excitement on Friday, when it reacted with considerable speed to comments by German Finance Minister Wolfgang Schaeuble, who floated the possibility of the country’s bailout continuing without the International Monetary Fund.
The response from Athens was that if the IMF is out of the picture, the review which has been dragging on since last year will be concluded almost overnight and without the need for any new measures to be legislated. It is no surprise that the SYRIZA-Independent Greeks administration was taken by the idea of the IMF being excluded from the program. Many government officials, including Prime Minister Alexis Tsipras, have suggested in previous months that life would be much easier if the Fund withdraws as there would be no need to discuss austerity measures that Athens has described as “illogical.”
The thinking appears to be that if the IMF is left out, the swift conclusion of the review that would – theoretically – follow would unlock the benefits that could flow from that (e.g. inclusion in the European Central Bank’s quantitative easing scheme and strong growth) and the government would not be forced to absorb the impact of having to enter a new and damaging round of discussions domestically about unpopular measures, such as cutting pensions or reducing the tax-free threshold for incomes.
One could argue that this is the correct path to follow as it removes any uncertainty and gives the economy a chance to recover. Of course, that would assume that the government’s decision is driven by what the country’s interests rather than its own political survival instincts.
However, we are unlikely to ever be able to form a full opinion because it is highly improbable that events will play out in the way the government seems to envisage. Firstly, it is not clear whether Schaeuble’s musing about the possibility of the IMF being left out of the Greek program and the European Stability Mechanism taking its role is aimed at preparing public opinion for such an eventuality (after pledging to German MPs in 2015 that the Fund would be fully involved) or whether he wants to prevent such a turn of events and keep the Washington-based organization in the group of lenders.
In his interview with the German newspaper Suddeutsche Zeitung, Schaeuble pointed out that if the IMF is excluded and the ESM takes over this would require a new bailout to be drawn up and then approved by German Parliament (as well as other eurozone member states’ parliaments). This hardly seems like the swift conclusion to the current process that Athens would like. It also raises the risk of Greece not receiving any bailout funding in the next few months and not being able to meet its obligations in July, when the government has to redeem bonds worth 6.5 billion euros and pay another 300 million euros to the IMF.
Schaeuble’s comments, which refer to the need to “significantly improve” the terms of Greece’s bailout, also suggest that Athens can forget about the prospect of enjoying an easier ride if the IMF is not on board. If anything, the ESM monitoring the Greek program would give Berlin an even more influential position than it currently has. It should not be forgotten that the ESM treaty means that the voting rights of the member states, which are represented on the board of governors, is in line with the share of capital and guarantees they have provided. This means that Germany has 27 percent of the voting rights and veto power. The ESM’s emergency voting procedure, triggered if a consensus is not achieved, means there must be a qualified majority of 85 percent to approve a decision.
The absence of the IMF would also likely signal the end of any discussion about medium- or long-term debt relief measures, which is so politically awkward for Germany and other eurozone member states, but which the Fund has tried to keep on the agenda. There also seems little chance of this blow being cushioned by inclusion in the ECB’s QE scheme. Officials from Frankfurt have been stressing recently that the conclusion of the review alone will not tick the necessary boxes. The ECB also wants to be sure that Greece’s debt is sustainable before it starts snapping up Greek government bonds. Without medium-term debt relief, this becomes an incredibly hard equation to solve.
In such a situation, the SYRIZA-led administration will be left pinning all its hopes on a fearsome economic recovery. While concluding the review would help restore confidence, the country’s economic problems run so deep that if other factors, such as more substantial debt relief, QE and a let-up in fiscal targets, are absent we can only really expect the economy to sputter along rather than spark into life.
The distance Greece has to cover before its economy can be considered in good health was emphasised by the employment data released by the Labor Ministry’s Ergani system on Friday. It showed that December produced net hirings of 11,132, meaning that over the course of 2016 136,260 more people had been taken on than fired. This was a rise of 36.7 percent on the previous year’s figure and the highest annual reading since 2001.
On the surface, things appear to be heading in an encouraging direction. However, closer inspection of the data reveals that there is plenty to be cautious about. More than half (54.7 percent) of the 2.1 million hirings made in 2016 were for flexible, rather than full-time work. Also, the kind of sectors providing jobs do not suggest that a robust recovery is in the making. The food service and retail sectors, for instance, were among the major job creators, providing neither longer-term security for employees or too much added value for the Greek economy. In December, the category that provided the most jobs was “Musicians, singers, dancers and other artists.” It is not the stuff that flourishing economies are made of.
There are many specific reasons, as well as an overarching one, to be skeptical about the speed and enthusiasm with which the Greek government responded to the mere hint by Schaeuble that the bailout could continue without the IMF. The Fund, as it has acknowledged itself, has got many things wrong in Greece and should not be free of scrutiny or doubt, but the idea that removing it from the picture will solve everything does not stand up to even a cursory inspection. There can be only one response to those who argue the opposite: Not so fast.
