Perhaps for the first time since the beginning of Greece’s sovereign debt crisis, the question hovering over Europe is not whether the storm-tossed nation has lived up to its obligations to lenders, but whether they will live up to theirs.
Greeks fully expected that a eurozone finance ministers’ meeting in Brussels today would approve a bailout instalment of 31.3 billion euro, after parliament last week passed a controversial new austerity package and a tough 2013 budget. But by Monday night those expectations were dashed. The Eurogroup ended with a decision to reconvene a week later.
Greece's loan instalments have been delayed since last spring because of a political crisis, and another 12 billion euro in instalments have also come due. Prime Minister Antonis Samaras told parliament last week that he would try to rake in as much of that as possible to refinance banks, pay off overdue bills to state suppliers and provide liquidity to the marketplace. Finance Minister Yannis Stournaras said on Friday that “there is not the slightest reason to worry... Greece is doing what it ought to, and you can be sure that Europe will too, and the instalment will be paid out.”
But it appeared on Monday that approval would be delayed, after inspectors had failed to deliver to the Eurogroup a long-awaited progress report on Greece. The inspectors represent the so-called troika of Greece’s creditors – the European Central Bank, the European Commission and the International Monetary Fund. They have approved more than 200 billion euro in loans to Greece since May 2010, after Greece failed to draw money from markets.
The progress report may be a figleaf. There appear to be deep divisions among creditors over whether Greece can be saved, and at what cost. The debate began last week, when European Commissioner for Economic and Monetary Affairs Olli Rehn told Reuters that “the debt burden of Greece is clearly not sustainable.”
The debt had been declared sustainable by the International Monetary Fund after a debt restructuring last March, which saw private lenders forgive 107 billion euros’ worth of debt. But Greek debt is now forecast to reach 189 percent of GDP next year, after the economy shrinks an estimated 6.5 percent this year and 4.5 percent next year.
There is concern for the health of the rest of the eurozone, too. The Commission’s outlook released on November 7 showed that the eurozone economy was set to shrink by 0.4 percent this year and remain stagnant next year. Such news is likely to strengthen the hand of fiscal hawks like Germany, Finland and Holland.
And a broader EU battle over the seven-year budget is brewing next month, with Britain and Germany preparing for a showdown over the size of the budget.
Finally, Germany is at odds with the United States over how to turn around the eurozone’s malaise. Germany insists on further fiscal discipline, while US Treasury Secretary Timothy Geithner has argued that austerity is driving the EU towards recession and away from growth.
Against this backdrop of larger problems and confrontations, Greece’s conservative-led coalition has for now placed itself quite well to argue for a disbursement of some 41.3 billion euro in accumulated loan instalments.
It has ratified in parliament a 13.5 billion euro austerity package, with 10.8 billion euros’ worth of those measures front loaded in the 2013 budget, also ratified. Those measures will bring to a staggering 60 billion euro the total spending Greece has cut since the beginning of the crisis, equal now to almost a third of its economy after four years of recession. In the process it has narrowed the deficit from 36 billion euro in 2009 to a forecast fourteen billion euro at the end of this year, and it plans to eliminate that deficit in 2017.
The political cost of these achievements has been enormous. The forces backing eurozone bailouts, the socialists and conservatives, have seen their share of the vote plummet from a combined 77 percent of the popular vote in 2009 to 42 percent last June. Even the young coalition that emerged from that election is showing signs of advanced ageing. It already bears the scars of last week’s two legislative battles. Eight of its members of parliament have defected. Its smallest member, the Democratic Left, stepped aside in Wednesday’s crucial vote on the austerity package, showing that it has only one foot in the government. Prime Minister Antonis Samaras put a brave face on matters last night after approval of the budget by 167 votes to 128, declaring the week a victory and promising a new focus on growth.
But indecision on the bailout could badly shake the Samaras government. It faces stiff competition from the radical left opposition, Syriza, which has in the past supported unilaterally defaulting within the eurozone. Recent polls show that Syriza enjoys a slight lead of two to three points above conservative New Democracy. Those figures are not unequivocal. Greeks still prefer Samaras as prime minister to Syriza’s Alexis Tsipras, and they prefer a conservative-led coalition to a Syriza-led one. But the fact that a relative majority is now consistently favouring Syriza over New Democracy shows that Greeks are gradually losing their fear of the uncertainties a Syriza-led government might entail.
The difference between pro-bailout and anti-bailout forces can be expected to grow in the new year, as cuts to salaries and pensions take effect while growth takes longer to achieve. The government expects European support in response to that strategic choice of priorities. Failure to provide it now would be a major betrayal of Samaras and his partners.