The May 24, 2016, agreement between Greece and its creditors is the southern European country’s third bailout. The European Commission, the European Central Bank and the International Monetary Fund (IMF) have again kicked the can down the road and left the same set of problems relatively untouched—too much debt, where to find a Greek engine of economic growth and public discontent with depression-like economic conditions. And failure to address these problems leaves the European Union’s (EU) southern flank unsettled and its geopolitics messy.
Greece’s time of troubles commenced in 2009, sparked by the Great Recession, structural weaknesses in the economy, too much credit available from European banks, corruption and revelations that the Greek government had substantially underestimated fiscal deficit numbers. In 2012 Greece defaulted on its debt, which was probably the largest sovereign default in history. The country has since undergone a sustained period of economic austerity, high unemployment (still around 25 percent and close to 50 percent for youth), and protracted economic contraction that continues today.
Greece’s debt as a percent of GDP stood at 176.9 percent in 2015, according to Eurostat; in 2012 it was 159.6 percent. One would think that economic plans worked upon by Greece and its creditors would seek to reduce the debt burden. In the latest agreement, Greece won additional pledges of debt relief, though not much will happen along this front until 2018 (which is after the next federal German election in 2017!) and only if certain conditions are met. One of those conditions is for Greece to achieve a 3.5 percent of GDP primary surplus by 2018, which is not likely, considering the economy is expected to further contract in 2016 and limp into 2017.
There is some good news. Under the new deal Greece has been allocated 10.3 billion euros ($11.5 billion), which will allow it to repay its short-term debt obligations. This is important because June and July could be challenging months for the EU, with the Brexit vote looming on June 23 and Spanish elections following shortly thereafter. For hassled EU and European Central Bank officials this is good news, as the new bailout lowers Greece as a risk factor for global financial markets.
But the new agreement leaves messy geopolitics in its wake. In Greece, Prime Minister Alexis Tsipras’s government is in trouble. His administration is blamed for imposing austerity measures and the selling off of public assets like harbors and airports (such actions are associated with unemployment). Syriza is supposed to be anticapitalist, a party for the people and opposed to privatization, which has meant for many of the party faithful a betrayal of what the party initially represented.
It is not helping Prime Minister Tsipras that his government is also being hurt by corruption scandals. The combination of such factors explains why the opposition center-right New Democracy (ND) is ahead in the polls. Considering that Tsipras’s Syriza party holds 144 seats and their coalition partners Independent Greeks have nine seats out of 300 in the parliament, a new election cannot be ruled out, heightening the political risk. While ND would probably support most of the new deal’s measures, the volatility of Greek politics could result in a fresh coalition government, which could complicate matters in terms of the imposition of reform policies and meeting economic targets. The situation raises prospects for a new election, which adds a degree of uncertainty.
Greek relations with Germany are complicated. The Germans and other northern and eastern Europeans have consistently pushed austerity on the Greeks and refused most requests for debt relief, which has resulted in a brutal downturn in Greek social conditions and political turmoil both at the polls and in the streets. Indeed, in April 2016, Germany’s finance minister Wolfgang Schäuble asserted at the International Monetary Fund meetings in Washington that debt relief “was not necessary,” noting that it would distract Greece from taking steps needed to transform its economy.
While Germany is the leader in the “if it doesn’t kill you, it’s good for you” school of reform and austerity, countries such as Estonia, Latvia and Lithuania embraced tough austerity measures and painful structural reforms in the troubled aftermath of the Great Recession and the bursting of local credit bubbles. They did not get any debt relief—and they are now members of the eurozone. Ireland falls into the same bracket in terms of embracing tough austerity measures, and is now one of the strongest growing economies within the EU.
Differences over debt management have left a divide within the ranks of the EU, as Greece is hardly alone in having trouble—Portugal and Italy still have large debt loads and slow growth. Furthermore, Spain’s upcoming elections are partially shaped by antiausterity sentiment among a large part of the electorate, which could bring to office (possibly in a coalition) left-wing Podemos, which favors a move away from austerity and sticking the costs to the banks.
There are two other messy aspects of southern Europe’s geopolitics. For one of the EU’s most beaten-up economies, Greece was whipsawed by the migration crisis, which brought in several thousands of people fleeing Middle Eastern battlefields. As the rest of Europe opted to close or tighten their borders, Greece was left with a major problem and little resources. The recent deal with Turkey to send the refugees back probably helps, but the migration crisis has not ended.
Considering the challenging nature of Greek-EU relations and the problems linked to migration, the Tsipras government has been willing to remind its fellow Europeans that Greece does have some geopolitical cards to play. This was evident in Athens playing host to a two-day visit from Russia’s Vladimir Putin in May. The Russian leader used his first trip to an EU country in 2016 to criticize EU sanctions against Russia for his annexation of Crimea. Putin also described a newly upgraded U.S. missile defense system as a threat to Russia’s security and vowed to retaliate.
While the ruling Syriza party has ideological sympathy with Russia, there are other more concrete reasons that Prime Minister Tsipras wishes to keep up cordial relations with Russia. Considering the deleterious state of the Greek economy, Athens would very much like to lure back Russian tourists, whose visits fell last year. With a deterioration of relations between Russia and Turkey, Greece would very much like, and needs, Russian tourist money to help revive the economy. Additionally, Athens would like to have the engagement of Russian companies as it moves ahead with the privatization of its railroads and other transportation assets.
Although Greece has a new bailout from the EU and IMF and the country has been removed from the menu in the short term as a major risk factor, most of the problems, like too much debt and its crushing burden on the population, still exist. The new bailout only further kicks the can down the road, with a distant hope that future generations will be able to work their way out of debt with a stronger economy (which is questionable as there is little incentive for the best and brightest to remain in the country). This also means that southern Europe’s messy geopolitics are likely to continue with the potential for further unexpected twists and turns. Greece will not leave the EU, but when it can, it will remind the rest of Europe that it is still there and sits at an important crossroads between Europe, the Middle East, Russia and Turkey.
Scott B. MacDonald is Chief Economist for Smith’s Research and Gradings.
Image: Wikimedia Commons/@FrangiscoDer