The political significance of Greece’s Eurogroup deal

The political significance of Greece’s Eurogroup deal

Athens, May 10, 2016/Independent Balkan News Agency

By Zacharias Petrou

The Eurogroup approved the Greek government’s proposal for an automatic mechanism that will make immediate, automatic cuts to pensions and wages via presidential decree if fiscal targets are not being met.

In light of this compromise, Monday’s Eurogroup meeting ended with Greece and the country’s creditors moving closer to an agreement that would conclude the pending bailout review and clear the way for debt relief negotiations.

The Eurgroup recognized the fiscal measures that were passed through Parliament on Sunday night and noted that Greece still has another 1 percent of GDP in fiscal interventions to pass, as well as to legislate the management of nonperforming loans and set up a new privatization fund.

Regarding the outstanding package of contingent measures worth 3.6 billion euros, Greece’s proposal for a mechanism that will make automatic cuts in public spending if Athens does not achieve its agreed primary surplus targets in the coming years was accepted with some changes.

Greece will not have to legislate specific measures up front. However, in order to complete the bailout review, Greece must vote into law the automatic spending cuts mechanism.

Only welfare and military spending are protected from the automatic cuts of the mechanism. Reductions to pensions and public sector wages will be made if fiscal targets are not met. The mechanism will automatically kick in every year in June if Eurostat data released in April show targets in the previous years were not met.

In order to complete the ongoing review Greek Parliament must now approve the remaining measures of the 5.4 billion euros reforms package (indirect taxes, non-performing loans management provisions, new privatization fund, public sector wage bill measures). Also, Parliament must approve the automatic spending cuts mechanism.

If the following steps are successfully completed, the May 24 Eurogroup could wrap up the first review and bailout funds can be disbursed to Greece (approximately 5 billion euros). Government sources said the amount could be even higher.

In terms of debt relief which the Greek government pressed for and was discussed for the first time at Eurogroup level, a series of actions were agreed.

Possible short-term, medium-term and long-term measures that can be taken to ease Greece’s debt burden will be examined by Eurozone finance minister. The aim is to have the recommendations ready by the next Eurogroup on May 24.

However, the bailout review has to be completed before any debt relief proposals can be finalized while for the short term the focus would be on optimizing debt management.

For the medium term the euro zone would consider longer grace periods and maturities as well as returning to Greece profits made by the European Central Bank on bonds bought under its Securities Markets Programme (SMP) and for investment.

In the long term, euro zone ministers said they would consider in 2018, if Greece meets its primary surplus target of 3.5 percent of GDP, whether more debt relief is needed to keep the country’s debt-servicing costs sustainable.

POLITICAL SIGNIFICANCE

The Greek government hailed the results of Monday’s Eurogroup in Brussels as a very positive step toward wrapping up the first review of Greece’s third bailout, leading to debt relief and the disbursement of rescue funds.

The Eurogroup meeting is considered a great victory for the government, stressing that specific commitments towards debt relief were made for the first time. Politically, Tsipras will seek to take advantage of the closure of the bailout review and communicate both to voters in Greece and prospective foreign investors that three years of stability lie ahead during which the economy will return to sustainable growth.

According to the government the review will surely be concluded on May 24, allowing the economy to grow.“Essentially, the first review is closing without additional measures, based on our proposals,” Prime Minister Alexis Tsipras said.

The government says there are the following positives to take away from Monday’s meeting: A road map for debt relief, a key Greek demand, was raised for the first time; the Eurogroup accepted the government’s proposal to set up an automatic fiscal mechanism if the country fails to meet its budgetary targets until 2018 – instead of legislating specific contingent measures up front.

However, opposition parties criticize the government’s handling of negotiations, pointing out that the Eurogroup announcement after the meeting did not justify the government’s confidence as actual debt relief won’t occur before 2018 and the government is being forced to implement more measures that will negatively affect all income brackets. The government is severely criticized – by parts of the local media too – for celebrating the implementation of tough catastrophic measures in exchange for vague promises on debt relief.