Greece: finding a sustainable and fair solution which enables the country to remain in the euro
BÜNDNIS 90/DIE GRÜNEN parliamentary group in the German Bundestag Position paper, 16 June 2015
The situation in Greece is on a knife edge. The negotiations between the Eurogroup and the Greek Government are deadlocked and the window of time to reach a workable compromise is diminishing. All involved must be aware of what a high price is at stake if no agreement can be reached. We expect Chancellor Merkel to continue to express a clear commitment to Greece remaining in the euro. The Greek Government, for its part, must finally embark on the ambitious reforms it has announced and work towards a fresh start in the euro in political, economic and social terms. In the absence of a sustainable solution, the recurring debates about a potential Grexit are endangering Greece’s political and economic stability, and causing the people of Greece, Germany and Europe as a whole to lose confidence in policy-makers’ ability to take action. Europe and Greece can no longer afford an endless succession of summits which produce no tangible results. All involved must prove that they can find a compromise which is viable in substantive terms and which can be supported by all sides, instead of sacrificing political clarity for crude internal political tactics or getting bogged down in thoughts of winners and losers, and thereby putting Europe’s future at risk.
For us Greens it was, is and will continue to be clear: Greece’s future is in the euro. From a political perspective, it is of the utmost importance for the Eurozone to hold together. The ongoing doubts about what currency, what government and what economic policy Greece will have are also proving to be toxic for any economic recovery.
For us it is also clear that it must be the goal of Greece’s policy and that of its European partners and the institutions to set Greece back on its feet again. We have no illusions in this respect: achieving this goal will not be easy. All the more reason not to make things unnecessarily difficult.
In recent years Greece has made progress in consolidating its public finances and undertaking structural reforms. Now it is important to build on this progress. A solution must be found which takes into account the economic and social situation in Greece and is of lasting benefit to the country. Only then will Greece actually be able to repay the financial assistance it has received to Germany and the other EU Member States. In other words, the partial success achieved in consolidating public finances must be turned into sustainable progress which will ultimately benefit Greece’s creditors too.
Austerity in Greece has failed. A viable solution requires fair and meaningful structural reforms, investments in the future in the sense of a Green New Deal, and socially and ecologically just consolidation of the public finances in which the revenue side is strengthened, for example through a fairer tax system. Further senseless austerity measures which do not contribute to structural consolidation of the public finances will exacerbate the downward spiral. Further budget cuts should therefore be focussed primarily on areas where there is a need to break up patronage-based structures.
It would be irresponsible for Greece’s European partners to withdraw. Such a move would signal the end of the principle of solidarity and our shared commitment to Europe. Rather it must be ensured that the necessary reforms in Greece do not fail because the Sword of Damocles hangs over them in the form of Grexit and insolvency.
We propose a restructuring solution for a limited period of time which would support the reform process and the economic recovery in Greece to the point where Greece could repay its debts on the basis of a growing economy. The ESM would assume the country’s payment obligations to the IMF and ECB until 2020, without this resulting in an increase in Greece’s total debt burden. This would allow debt sustainability and the economic recovery in Greece to be secured for the long term. As long as Greece’s cyclically adjusted public revenue remains higher than its public expenditure, thanks in part to the reforms undertaken in recent years, the country does not need any loans to finance its current spending. What Greece needs is, above all, an economic recovery, so it can reduce its spending on unemployment and on tackling the social crisis and take in more revenue from growing tax sources, revenue which can then also be used to service the country’s debts. Achieving this requires certainty that Greece will remain in the euro, and the necessary time to put in place a reliable framework, effective structures and the required investment.
Investing Greece’s primary surplus in the country’s future
In the face of the investment logjam and social situation, it was wrong to focus one-sidedly on generating a primary surplus in Greece’s public finances since this led to a further downturn in economic output and thus to growing debts. The institutions failed to take sufficient account of this undesirable development at the beginning of the aid programmes.
We believe therefore that the dividends accruing from reforms up to 2020 should not be used to service debt. Instead, the money generated by Greece’s citizens through savings and higher taxes must first be used to deliver effective and sustainable reforms to the administration, to stabilise the economy and to create stable conditions for investment in Greece. This is all the more important given that Greece’s principal creditors in 2015 and beyond are the IMF and the ECB. While no repayments on the loans from the EFSF are due before 2022, Greece is committed to making regular repayments to the IMF, the ECB and the remaining private creditors.
In order to ensure that at least for a limited period the reform dividend can be used for reforms in the country and at the same time the budget criteria of the stability and growth pact can be met, it is essential to find a solution regarding Greece’s financial obligations to the IMF and ECB at least until such time as reforms in Greece generate a sufficiently large dividend to ensure that the country is able little by little to meet its obligations again.
We therefore propose that Greece’s payment commitments to the IMF and ECB be restructured up to 2020 while in return Greece implements an ambitious reform programme which is geared to long-term sustainability rather than short-term measures to improve public finances.
Greece’s long-term stability must be ensured
The restructuring of Greece’s financial obligations up to 2020 must not be allowed to add new debts and further increase the debt mountain. We therefore propose that the European Stability Mechanism (ESM) should take over Greece’s debts up to 2020 under a third loan programme. The effect of this would be to replace Greece’s debts to the IMF and ECB by its obligations vis-à-vis the ESM, thus temporarily relieving the country of repayments and interest now due and ensuring that the nominal amount of Greece’s debts does not grow any larger. Greece’s obligations to the ESM would not be due until 2020. For Germany and the other EU Member States represented in the ESM this would involve the assumption of guarantees, but these would already be covered by the ESM. Overall this would give Greece the breathing space it needs to implement reforms.
For Greece this would signal a new beginning. The efforts of the past five years would not have been in vain. The fact that the reform dividends would remain in the country for a period of time instead of being used to service debt not only makes economic sense, it would also be a gesture of recognition of the hardships suffered by many Greeks.
Implementing statements of intent on a systematic basis and looking at the long term
Taking over Greece’s debts until 2020 requires more than statements of intent in return. Greece needs to systematically implement an ambitious programme of reforms.
In contrast to the position taken by the IMF, ECB and EU Commission and the attitude of the Federal Government, we believe that there is a need for a long-term approach with respect to the programme and new ways to consolidate public finances which do not make things worse for those in need. This is the only way Greece will be able to get back on its feet again.
The election result in 2015 revealed that that the majority of Greeks have had enough of the old system of nepotism and favouritism. The Greek people have had to pay bitterly for the failures of their governments in the past decades. Many problems are home-made: an inefficient public administration, corruption and oligarchic structures, a culture of tax evasion, failures in the rule of law and weak tax enforcement are the most glaring examples. Investors are deterred by an inadequate political and justice system, lack of access to funding and extreme levels of red tape in the country. So far too little has been done to tackle these deficits; instead there have been painful cuts to the social, health and education sectors, the brunt of which have been borne by the middle classes and low-income households.
Failings in Greece’s national crisis policy and the policy of the Troika and the Eurogroup have further exacerbated the home-grown problems and have failed to solve the country’s problems. Greece must not be a double loser in the crisis.
The launch of an effective and sustainable programme, fully backed by the government, to reform the tax system and general public administration should be the key criterion governing the paying out of the remaining funds available under the current programme. In return for this and the following gradual transfer of obligations vis-à-vis the IMF and ECB up to 2020 (as and when they fall due), the Greek Government should adhere to binding implementation benchmarks which result in a transparent and realistic timetable going beyond what has been announced so far.
Germany and the European partners must replace their short-term approach with a long-term perspective. This calls for a viable policy entailing a commitment today which will be offset many times over by the long-term gain in prosperity and political stability in Greece and Europe.
In the medium to long term Greece will continue to depend on the support of its European partners. It will take 10 to 20 years to deal with Greece’s debt problems. This makes it all the more important to devise sustainable strategies and solutions which have a stabilising effect on the country’s economic development.
If the new Greek Government resolutely pursues the course of reform it has announced, the Eurozone should support it in the process by offering further relief in terms of interest and loan periods. Moreover the EFSF and bilateral creditors should not exclude the possibility of offering conditional relief on debt repayment from the outset since this may become necessary in order to secure the country’s economic recovery and the success of reform efforts. The idea of government bonds where the servicing of the debt is dependent on real economic output is a step in the right direction. These types of bonds are a way of providing greater flexibility in public finances in times of unforeseen shocks, and if the economy grows more positively than expected, repayments are higher than previously estimated. Most of Greece’s debts held by public creditors should be indexed accordingly.
Greece’s handwriting on the programme
Greece must be able to take responsibility for its own future. The programme must bear Greece’s handwriting and it must be in the interest of the Greek people and their government. Difficult reform processes are most likely to succeed if they are transparent and systematically involve those affected.
Proposals so far from the Greek Government for important structural reforms are aimed at creating more transparency, less red tape and more efficient administrations. Reforms include strengthening the independence of the tax administration, abolishing tax privileges and tackling tax avoidance and corruption. In addition, the Greek Government intends to use the planned EU investment funds from the European Investment Bank to mobilise private investment. The Greek Government’s critical attitude to privatisation also has some justification. Privatisations that are damaging to the economy in the long term make no sense. The Greek constitutional court made the right decision to halt water privatisation. Overall we believe that in the light of decades of mismanagement, these are the right priorities.
But we also believe that there is an urgent need to tackle the social crisis. The social situation in Greece remains dire. Unemployment stands at 26 per cent, basic medical care is not guaranteed, and many people have to rely on soup kitchens. The measures announced by the Greek Government in its list of reforms including providing basic nationwide social insurance, stabilising small pensions for those on the poverty line, reviewing a return to flexible collective wage bargaining and handing out food stamps as a stopgap for people living in poverty are therefore important steps towards establishing more justice.
To shut one’s eyes and ignore the social crisis at the heart of Europe is irresponsible for fellow Europeans. We cannot simply accept mass unemployment, social distortions and a lack of prospects for large sections of the Greek population. That is why the EU must help Greece to alleviate the social crisis.
In terms of spending cuts, the burdens resulting from the consolidation of public finances fell disproportionately on groups without a strong lobby, while the middle classes, the SME sector and the private sector in Greece bore the brunt of efforts to generate revenue. But the wealthy should also be required to make their contribution to the extent necessary for the common good. Tax privileges must be abolished; for example, a harmonised European approach to the taxation of ships and ship owners must be found. Greece’s tax authorities need to be given technical support to investigate tax crimes and analyse illegal capital transfers.
In addition, the military and defence budget – which is larger than the EU average – must be reduced and the savings used to create scope for investments in the future.
Greece needs air to breathe: promoting future investments
The public sector must be rebuilt to bring it closer to the people and make it more efficient. Corruption must be resolutely tackled and a trustworthy system of justice established. The country needs efficient bureaucratic procedures (for example in relation to the awarding of public contracts, applications for concessions, licences, etc). In particular the tax administration and competition authorities need to be independent and have the means they need to do their job impartially and effectively. At the same time, corruption with respect to tax inspections, which is a particular problem for many small and medium-sized businesses, must also be tackled.
Universal access to the health system must no longer be restricted to emergencies but should be extended to the provision of primary care services.
Greece needs investments in the future to make it more competitive and create sustainable jobs. Aided by European funding, Greece must push ahead with public investment to maintain and build up key infrastructures. The country has enormous investment potential, for example in the areas of renewable energies and energy efficiency, sustainable agriculture and eco-tourism. Strengthening these areas of the economy will also help to reduce the foreign trade deficit.
An economic recovery can only take place if there is now much more investment in people’s minds, skilled labour, science and innovation. The “knowledge infrastructures” must not be allowed to fall into disrepair; they are in need of development and renewal, not breakup and staff cuts. The science and research landscape is in any case weaker than average and urgently needs a process allowing it to catch up, not further rounds of cuts, so that the innovation chain functions and the research and business sectors can work together.
There is also a need to give targeted help to small and medium-sized enterprises. This includes making the retail trade more competitive. The “Institution for Growth” initiative launched by the Federal Government and the Greek Government is a positive symbol in this respect but is still far too small to achieve very much.
Greece’s banking system will remain on shaky feet for as long as uncertainty about Greece’s future continues to cause a withdrawal of deposits. Lending remains weak. While the main reason for a lack of investment may be weak overall demand, stabilising the banking sector is crucial to successful economic development. This requires a viable concept for personal bankruptcy law in order to make progress on debt relief.
Democratic control over the enforcers
When the crisis was at its height, the International Monetary Fund (IMF) and the European Central Bank (ECB), alongside the European Commission, were important partners who had the technical expertise to set in motion complex programmes in a short space of time. But in the medium term these two institutions should step aside from crisis diplomacy. The ECB in particular has a difficult threefold role – as an independent central bank, as a supervisor and as a creditor. This inherent conflict of interest has become particularly apparent in Greece since the beginning of 2015 and must be terminated. In the medium term a European monetary fund under the control of the European Parliament must be responsible for the reform programmes. Until such time as such a fund is established, however, democratic scrutiny of the activities of the institutions (formerly: Troika) needs to be considerably strengthened. The European Commission in particular must be more accountable than hitherto to the European Parliament. Its work and decisions within the three institutions (Troika) must be subject to more discussion and scrutiny. In addition the principle remains: there can be no financial assistance without control.
In order to ensure the stability of the single currency in the future, decisive steps need to be taken to create a true economic and monetary union with more shared competences. Stronger coordination within the Eurogroup, the reformed stability and growth pact and the European Semester are first steps but are not enough. The institutions of the single currency must be strengthened and placed more firmly under the democratic control of the European Parliament.