The IMF should stay in the Greek rescue squad

11/10/2016

The country needs fiscal support as well as structural reform to grow

Good news coming out of the dismal mess of the Greek economy and its international bailout has been a rare commodity over the past six years. So it is tempting to celebrate the decision of the eurogroup of finance ministers that Athens has done enough structural reform to receive the latest €2.8bn tranche of its bailout.

In practice, a quiet measure of relief would be more appropriate than unbridled joy. While Greece’s government has done better than many sceptics feared following the shambles of last year’s referendum and re-election of Alexis Tsipras as prime minister, the measures it has enacted are highly unlikely to make a material difference to growth in the short to medium run.

The repeated warnings from the International Monetary Fund that Greece needs more fiscal space — and, if necessary, debt relief — are more apposite in addressing the country’s immediate priorities. If the eurozone authorities want to translate Athens’ fragile recent achievements into growth, they will need to look at the demand side of the economy as well as its productive efficiency.

Despite some grumbling from the usual quarters (Berlin), the eurogroup ministers have decided that Greece has done enough to reform its expensive pension system, liberalise the energy sector and set up a new privatisation agency to warrant the release of the final part of a tranche of money originally due earlier this year.

But the decision sets the eurogroup up for another confrontation with the IMF. The fund, an increasingly reluctant participant in the Greek rescue programme, has argued stridently that the country needs relief on the fiscal and debt front in order to generate growth. Germany has been keen to have the IMF remain as part of the rescue. But it needs to square that with its own instinctive aversion to further writedowns — particularly actual cuts in the face value of debt rather than more extension of bond maturities and reductions in coupons.

The IMF is right. Greece has made some notable changes to its economy, albeit from an extremely dysfunctional base. But structural reform is generally contractionary in the short to medium term; pensioners, for example, will cut back spending as they become less sure of their incomes. It needs to be accompanied by supportive fiscal policy.

As the fund points out, Greece has already made a huge effort in eliminating a primary fiscal and current account deficit from double-digit figures in six years. But it has relied on one-off adjustments and raising tax rates on a narrow base, strategies that are unlikely to be sustainable. The current plans to maintain a primary fiscal surplus of 3.5 per cent far into the future and nonetheless achieve high growth rates to reduce the burden of sovereign debt are, as the IMF says, unrealistic. And while restructurings have already reduced the net present value of Greece’s debt, there still remains an overhang that can only depress confidence.

At some point, Germany and the rest of the eurogroup may decide that it would rather have the bailout without the IMF if it means being able to avoid a debt writedown. That would be a serious mistake. While no one comes off well out of the Greek crisis, the fund has been one of the more constructive parties. It recognised the early mistakes that it and the other creditors made in expecting unrealistic amounts of economic adjustment, and then changed course. It was right to do so, and it is right about debt relief. Expelling the messenger now because the eurogroup does not like the message is not a sensible course of action.

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