“I think that there should be a solution in June somehow in order to restore some of the confidence in the Greek economy and come up with better growth”, Lars Feld, Director, Walter Eucken Institute told IBNA on the margins of the Economist Conference “A glimpse into Europe’s financial landscape. Greece: A comeback to the financial markets?”in Frankfurt. In addition Mr Feld spoke about US, German relations and stressed that “Despite all the rhetoric of Donald Trump, German investors have expanded their investments in the US because they can earn a lot of money there and they will do that”.
Read the full interview below:
Can you elaborate further on the scenarios regarding the course of negotiations concerning Greece?
I see three possibilities regarding the discussions about debt relief between Germany, and the Netherlands on the one side and the IMF on the other side. One possibility would be that Germany and the Netherlands give in at the June meeting of Finance Ministers. This is not very probable. Giving in means there is going to be debt relief now and the IMF participates in this program by paying loans to Greece as well. This is not highly probable because before the German general elections this would certainly be difficult for the CDU.
The second option is one that is not a clean solution but one that is somehow sticking to the letters of the agreement; saying that the IMF participates in the program only as it did until now, or it has done until now, but it does not pay out its loans until 2018. And so, in 2018, as projected, there is going to be an evaluation of the financial situation in Greece and then the Finance Ministers could possibly decide on debt relief, or they don’t provide it, but this is done in agreement and perhaps consensus with the IMF. So it is paid out later which means that this program is not officially concluded at the point that the Greek government actually wanted to conclude it. So it requires some flexibility from the Greek government to accept a solution like that. I think this is the solution which is quite probable. It is not a clean solution but it is a clear political compromise for everybody who is involved.
The third solution would be one which looks further down the road at what is going to happen. And then you look at the calculations by Stournaras and the Bank of Greece regarding the interest burden that is coming up in the future, the interest burden increases because Greece is entering capital markets, it is refinancing its debt according to the conditions it could get there, and the conditions there would be much less favourable than it currently receives by ESM loans.
So the third possibility would be to think about a prolongation of the third program; having an additional 2-3 years in which the ESM is still supervising the reform prospects, the reform achievements of Greece on the one side, but is also refinancing Greece and therefore postponing the point of time when Greece is entering capital markets by an additional few years. This will help on the one side regarding the interest burden and on the other side regarding reforms. Because this is the essential thing. You need to have additional reforms, further privatizations for example, de-regulations that we also mentioned on the panel, giving foreign direct investors much more confidence to provide investment in Greece and then you have higher economic growth. Growth is actually key for the sustainability of public debt in Greece.
That sounds like the thoughts of Wolfgang Schaeuble. In the third solution, would a new program, a new memorandum, be necessary?
I am not a lawyer so I don’t know what all the legal obstacles are to prolong the third program without having an official fourth program. Because a fourth program would be difficult to stomach politically, either for European partners or for Greece. But I also know that lawyers can find a way to come up with a good solution.
Are you concerned that further delaying the resolution of the program review and debt relief will increase uncertainty and damage the Greek economy?
Well I think it already has done so to some extent. At the beginning of the year, the first quarter of 2017 was somehow disappointing regarding the growth performance. It is very difficult, given that performance, to come up with growth figures higher than 1 percent for the whole year. So there must actually be a boost of investment in the remaining months, which is actually only half a year. It is very difficult to achieve. There is already harm that has been done and I think that there should be a solution in June somehow in order to restore some of the confidence in the Greek economy and come up with better growth. It is very important.
How crucial is an imminent deal on debt relief in terms of the Greek economy entering a sustainable growth phase?
I don’t think that you need to have much debt relief. Possibly, an increase could work even without debt relief. Because, actually the key is growth. When you look at the growth assumptions of the IMF, they are very very moderate. Even its own experience in the past, since the crisis hit Greece, they were at the beginning advocating higher growth rates of real GDP and now are overly cautious. Given the reduction of real GDP in Greece, it is probable that we are going to have a takeoff and that growth rates are higher than 1.5 percent. Actually, 2.5 percent for the Greek economy is feasible, it is possible. It is not so outrageous to have that. Of course you don’t get 10 percent or 6 percent that you find in China, but on the other hand 2.5 percent is not so much. When you have that for ten years you are already in a much better situation than you are now. I think this is important to have in mind. And we must see what the possibilities for the Greek economy are. I am not in line with what was presented by McKinsey here but on the other side when you think about the high share of public firms, public enterprises in percent of GDP compared to other Euro-member countries there is a lot of leeway for additional growth effect simply due to privatization.
Do Greece’s European creditors need the IMF on board the Greek bailout program? Do we need perhaps to create a mechanism like the IMF in the EU?
Perhaps we do. But I am cautious to make any remarks. But of course we are discussing a European monetary fund, to use the ESM as a first step and develop it towards a European monetary fund. But, it very much depends on the details there. So, I would not advocate such a solution in general or to have one in any case. So it very much depends on the design of that institution in order to come up with a better institutional framework for Europe.
Are you optimistic for the European economy?
I am optimistic for the European economy. Germany is actually in a boom phase.
What about developments with the US, China and their “One Belt One Road”…?
Look, we’ve had all this political haggling for many years and what you currently see in the data is that despite all the rhetoric of Donald Trump, German investors have expanded their investments in the US because they can earn a lot of money there and they will do that. When you are asking investors in Germany, in particular medium size firms, from machinery for example, they plan higher investment in the US. So we can have many uncertainties when you simply look at politics and sometimes it is better to concentrate on the direct investment possibilities./IBNA
Lars Feld is director of the Walter Eucken Institute, member of the German Council of Economic Experts, chair for economic policy and constitutional economics, Albert-Ludwigs-University of Freiburg