By Constance Baroudos, M.A.
The two major achievements of European integration, the common currency and the free movement of people, are in danger — and Greece is on the front lines in both cases. Even though the three international bailout loans accepted by Athens over the past six years have resulted in loss of economic control, tax hikes and high unemployment rates, Athens has made some recent progress to stimulate growth. Athens still must implement controversial reforms next year that may cause the government to lose its majority in the Greek Parliament.
Athens signed its first major deal to privatize 14 airports for €1.2 billion ($1.3 billion) with Fraport, a German airport operator. The company will pay a fixed annual rental fee of €23 million, and invest €330 million to upgrade facilities over the next four years. In addition, China Cosco Holding Co., who already operates two container terminals there as a hub for Asian exports, is the sole bidder for a majority stake of the Piraeus port expected to generate about €700 million. The second biggest Greek port in Thessaloniki is expected to be privatized next year, and binding bids are anticipated in April.
The Greek government will pay to possess 51 percent of Greece’s Independent Power Transmission Operator, which is owned by the Public Power Corporation; the remaining 20 percent will be sold to a private investor and 29 percent will float on the Athens stock exchange. Moreover, Greece’s banks suffer from nonperforming loans including mortgages, consumer debt, and company borrowing — more than 48 percent are not being repaid on time, primarily due to lack of jobs and income. As a result, Greece developed a secondary market for non-performing loans, debt receivables unpaid for a period of more than 90 days. Non-performing loans are to be managed by loan asset companies to stabilize the banking sector by providing immediate liquidity to the relevant credit institutions while assisting borrowers with restructuring debts. These moves send a strong message that the Greek economy is aiming for growth.
Considering Prime Minister Alexis Tsipras has publicly stated he does not support the reforms, these are some impressive developments, but Greek citizens are not happy. Some Greeks feel the privatization of state assets undermines growth because it sells Athens’ advantages to foreign states. Furthermore, over 60 percent of Greek citizens voted against austerity in a referendum earlier this year – the first time citizens were able to voice their opinion on the economic crisis. Instead of keeping campaign promises, Syriza, the political party in control of the Greek parliament, agreed to more austerity or risk exiting the Eurozone. Unfortunately, Greece is likely to receive only €2.5 billion from privatization deals, less than the €3.7 billion agreed to in the most recent bailout agreement. At this time, the government holds a fragile majority of three members of parliament, down from five after the September election. It will not be a surprise if the government’s majority collapses again and new elections are called in 2016.
In the beginning of next year, Athens will struggle to pass key reforms, including revamping the pension system. Greece has one of the most expensive pension systems in Europe, consuming 17.5 percent of GDP, and about one in five Greeks are over 65 years old. While pension checks are not large (the average pension is about €700, and 45 percent of pensions are below the poverty rate of €665), the pension system is suffering a deficit due to decades of tax evasion and unemployed youth not able to make financial contributions. While Greece’s creditors insist on cutting pension costs by €1.8 billion, Syriza would rather increase employer and employee contributions as pensions have already been cut over 10 times since the beginning of the financial crisis. This means there will be intense controversy over pensions in the beginning of 2016.
Fulfilling the first wave of policy changes agreed to in the latest bailout is necessary for the European Union (EU), European Central Bank, and International Monetary Fund (IMF) to conduct the first review of the Greek economy. After this review, discussions on how to restructure Greece’s €320 billion debt will follow – recall the IMF determined Greece’s debt to be unsustainable in June. Restructuring the debt could include extending the repayment due date, delaying payments, capping interest and debt service costs, and tying repayment to GDP growth, giving Greece’s economy some time to grow. Without restructuring the debt, Greece’s economy will likely shrink in 2016, and unemployment will remain high.
While the IMF and White House promote a haircut on Athens’ debt, Greece’s creditors say this is not an option. This is ironic given that Germany was the recipient of one of the largest restructuring programs in history after World War II — Greece and about 20 other countries wrote off a large chunk of German loans and restructured the remaining debt by extending the repayment schedule, and granting a lower interest rate. West Germany’s debt repayment schedule was linked to its ability to pay by tying repayment to its current and expected trade surpluses. Thus, Germany was free of difficult debt payments, trading partners were incentivized to buy German goods, and its economy was able to grow.
The European unification project has been called into question because it has currency integration without a corresponding political unity. Financial crises as seen in the Eurozone do not occur in the U.S. because it has a strong central government – the federal government provides automatic bailouts to states in trouble. After the savings and loan crisis in Texas in the 1980s, for example, taxpayers in other states paid to clean up the economic mess – these states did not ask for their money back as Eurozone members are currently asking of Greece. Hence, it is a political choice to have a debt crisis since the European Central Bank could guarantee Greece’s debt and interest rates would come down as a result. Furthermore, Eurozone members are not able to devalue their currency to make exports more attractive and increase foreign investment. Austerity has only been shown to work if countries are able to devalue their currency, like when Canada slashed its debt in the 1990s – it was able to maintain growth and reduce unemployment by reducing interest rates and encouraging private spending while devaluing its currency to encourage exports.
The refugee crisis is also placing more financial obstacles in Athens’ path. In 2015 one million migrants entered Europe, 800,000 of them via Greece. The Hellenic Republic has spent about one billion euros coping with the influx. Greece is working with the EU to create a common immigration policy and improve cooperation with surrounding countries. The Greek government is also working with Turkey to eliminate human trafficking networks, share information, and cooperate with responsible authorities like the police and coast guard.
Greece has made some progress towards growth that will hopefully lead to an increase in jobs, more tax revenues for the government, and further foreign investment in the country. After restructuring the Hellenic Republic’s debt and the economy becomes stronger, Athens may then be able to reduce taxes to increase private sector spending, and Tsipras may be able to fulfill his aim to lift capital controls by March 2016.