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Contemplative Easing
Greece is out of the frying pan of its sovereign debt crisis, but both it and the EU must avoid the fire ahead
By Dong Yifan | NO. 40-41 OCTOBER 4, 2018
Citizens window shop during the summer sales season in Athens, Greece, on August 22. The retail sector welcomed Greece's exit from international bailout programs (XINHUA)

On August 20, Greece formally exited the international financial rescue programs introduced by the European Union (EU), bringing temporary respite to the destruction caused by the European debt crisis to Greece's economy. This is good news for the economies of the euro zone in 2018, and the EU authority wasted no time in commending Greece for the achievements of its economic recovery and structural reform.

European Commission (EC) President Jean-Claude Juncker hailed that the conclusion of the stability support program marks an important moment for Greece and Europe, calling it a "new chapter" in the country's "storied history." EU Economic Affairs Commissioner Pierre Moscovici was also full of praise, stressing that Greece has turned the page to become a "normal" member of the single currency.

Turning the page

The economic situation in Greece has generally improved. The Greek economy grew by 1.4 percent in 2017, returning to normal levels after recessions in 2015 and 2016. Fiscal surplus was 0.6 percent in 2016 and 0.8 percent in 2017, while the unemployment rate has been in decline since 2013. Meanwhile, the ruling Syriza coalition, which led a referendum on the bailout deal in 2015, has proven a steady hand at the helm of the government.

Among the PIIGS (Portugal, Italy, Ireland, Greece and Spain) countries affected most by the European debt crisis, the economies of Spain and Ireland have already returned to a trend of robust growth. Ireland was even dubbed the Celtic Tiger between 2014 and 2015 for its strong recovery, turning itself into a model for boosting competitiveness and market vitality within the EU. Italy and Portugal showed no further significant risk exposure despite similar concerns existing over their public debt ratios and deteriorating banking conditions. Greece, the first country to be bailed out and the country with the heaviest public debt, has finally emerged from eight years of bailout programs, demonstrating that for now, it does not need to rely on foreign aid to support the sustainable development of its own finance and public debt, an important signal that the debt crisis is at an end.

European fiscal and financial governance structures have also been improved amid Greece's bailouts, gradually setting up a risk control network for euro zone countries. Since the debt crisis flared up, risk exposure in countries such as Greece far exceeded fiscal revenue, and the market credit of peripheral euro zone countries was thus questioned. Investors even predicted that the possible debt default of these countries might eventually endanger the euro's credit and thus heavily indebted euro zone members without bailout mechanisms in place were directly exposed to the speculation of financial markets.

As a result, a massive crisis developed only a few months after the emergence of Greece's debt problem. The euro zone, after drawing on these lessons, actively explored ways to establish a mutually supportive debt-solution framework in the early stages of the crisis.

In May 2010, the 17 euro zone countries jointly established the European Financial Stability Facility (EFSF), which, with the support of the German debt management authority, was able to raise funds through bonds and other financing methods to purchase the sovereign debt of euro zone member countries, so as to build market confidence in euro zone debt. In October 2012, the EFSF was transformed into the European Stability Mechanism (ESM) with the support of euro zone members, upgrading from a temporary organization to an important institution of the EU to enhance the fiscal and financial governance of the zone.

The funding sources of the ESM include both the EU budget and the debt guarantees pledged by euro zone countries based on their economic size, which now stands at nearly €700 billion ($811 billion). Timely intervention and a willingness to share the risks of euro zone members makes the ESM an important mechanism to eliminate concern over risk control and avoid unnecessary losses in any country where a debt crisis is emerging. In the future, the ESM will support the financial status of euro zone countries, and the risk of crises will be greatly reduced.

EU leaders hailed the success of Greece's exit from the bailout plan, mainly to emphasize that EU governance in the European debt crisis and its structural reform had achieved tangible results. Greece's transformation is of symbolic significance for the EU, which faces multiple challenges both internally and externally to its governing authority.

At the same time, the construction of the euro zone's governance mechanism, as well as the European Central Bank's (ECB) quantitative easing policy adopted at the beginning of 2015, have contributed to improving the economic fundamentals of the euro zone. As a joint result of global economic growth and anti-crisis measures, the euro zone has emerged from recession, achieving its goal of restoring economic capacity to pre-crisis levels in 2017. Greece's exit from the bailouts undoubtedly shows that the country and the euro zone are leaving both recession and crisis behind.

Long way ahead

However, the conclusion of bailouts does not mean that the losses and scars sustained during the European debt crisis have been totally wiped out. Greece's economy totaled €177.7 billion ($205.8 billion) in 2017, shrinking 26.6 percent from 2008 and failing to even recover to 2014 levels. By way of comparison, the EU's GDP grew by 17.2 percent over the decade, with Germany growing by 27.9 percent. As a result, Greece's public debt ratio has continued rising, even though it has been striving for fiscal austerity and guaranteeing fiscal surplus. In 2017, the ratio was still as high as 178.6 percent. At present, Greece still owes a total of €289 billion ($334.8 billion) in debt to the EU, the ECB and the International Monetary Fund.

Given Greece's fragile economy and national finances, the EC has proposed "enhanced post-program surveillance" to oversee Greece's continued austerity and reform, the first assessment of which started on September 10. Greek scholars pointed out that the reform of public administration, the lowering of the minimum wage, the privatization of port and energy enterprises, and tax increases must be continued, while the intensity and progress of the reform should be strictly monitored by the EU. As ESM Managing Director Klaus Regling said, the bailout agreement reached will not be changed, indicating that Greece remains under the strict supervision of the EU and must continue to fulfill its commitments.

The Greek economy and society have paid a heavy price in emerging from this crisis. The primary measures of so-called structural reform were to cut public welfare and services, promote the privatization of state-owned enterprises and increase taxes. People's living standards and the internal investment environment have both been badly affected, while the impact on domestic consumption and investment has severely dampened the main drivers of economic growth. Not only did public spending fail to serve as an anti-crisis tool, but it hit Greece's short-term growth.

At the same time, the long-term structural problems facing Greece are hard to resolve. For instance, Greece suffered a huge deficit in international trade—a discrepancy of €10.5 billion ($12.2 billion) in the first half of 2018—evincing the shortage of its products and the lack of competitiveness of its industries. In the World Bank's ranking of the global investment environment, Greece came in at 67, better only than Malta among EU states. With workers required to pay nearly a third of their income in taxes or to fulfill social security payments, the tax burden of Greece ranks second only to France.

The EU's solutions, in fact, have had a limited effect on stimulating the Greek economy to create a virtuous cycle, while investment in infrastructure in the country has also been stalled. The bailouts, initially intended to help Greece out of the crisis, have actually frustrated the Greek people's recognition of reform and in some cases their confidence in their own

government as well as that of the EU. An opinion piece in the British newspaper The Guardian pointed out that Greece's exit from the international bailout mechanism was hardly a success as the impact of austerity on people's lives would redefine the social contract under a democratic system. Upon the conclusion of the bailout plan, the New Democratic Party claimed that the ruling Syriza coalition had failed to live up to its campaign promises and was still sacrificing ordinary people's lives at the behest of the EU.

Greece's troubles are in fact a reflection of the much larger issues facing the EU, where public trust in political elites and belief in traditional ideas are being plagued by one setback after another, with economic recession in member states, the refugee crisis and forest fires, a few recent examples. As a result, damage has been caused at the social and political level, which is difficult to remedy with economic growth and is aggravated by anti-establishment, anti-institutional and anti-elite populism that often boils over during elections and referendums. It is therefore essential for Greece and the EU as a whole to boost the competitiveness of their economy and, more importantly, to address their internal and external crises and their aftereffects, so as to promote improvement in the political and social spheres.

The author is an assistant researcher with the China Institutes of Contemporary International Relations

Copyedited by Laurence Coulton

Comments to yulintao@bjreview.com

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