Greece's new proposal for a eurozone bailout hopes to assuage the country's creditors and stave off a perilous exit from the European monetary union. But as finance ministers from 19 countries mull over the document this weekend, questions remain about Greece's longer-term ability to extract itself from economic despair -- something the proposed debt lifeline hardly addresses.
A nod of approval from the hard-nosed German Finance Minister Wolfgang Schäuble and company would ease fears of a eurozone disintegration and give Greece breathing room on its existing debt repayments. But with more than $350 billion in outstanding debt and an economy far from healthy, it’s not clear how the three-year bailout would solve a crisis at least a decade in the making.
“It’s delaying the inevitable. I think things have deteriorated too far,” says Barry Bosworth, a senior fellow at the Brookings Institution. “But the counter to that is that there’s an awful lot of economic suffering that’s going to take place if Greece doesn’t take the alternative.”
In the proposal Thursday, Prime Minister Alexis Tsipras asked for a bailout totaling 53.5 billion euros, or about $59 billion, to help make good on a litany of upcoming debt repayments -- crucially, a 3.5 billion euro payment to the European Central Bank due July 20. Eurozone finance ministers are scheduled to vote on the proposal Saturday.
In return, Greece’s leadership has promised to make wide-ranging reforms to its value-added tax system, continue privatizing government holdings and shake up labor laws. Tsipras sought a higher corporate tax rate and made concessions around phasing out a contentious tax preference to Greece’s islands.
Pensioners May Bear The Burden
But the loans will come with cuts in government spending that many in Greece’s government have previously deemed unconscionable. Pensioners would be asked to shoulder much of the burden, contribute more to their health costs and surrende popular top-up benefit additions.
Overall, Greece would need to see a primary surplus -- tax revenues minus spending, ignoring interest payments -- of 3.5 percent by 2018, scaling up from 1 percent in 2015.
Bosworth says that’s a tall order for an economy that’s currently in deep distress and struggling to provide sufficient tax revenue. “It’s asking the impossible of the government.”
In May, industrial production fell a dramatic 4 percent. A quarter of Greeks remain unemployed, with youth joblessness hovering around 50 percent.
Though Greece's public sector was indeed bloated relative to its neighbors, many economists have blamed previous bouts of austerity measures for the grinding recession. As government spending fell and public-sector payrolls shrank by hundreds of thousands of workers, private industry has been unable to pick up the slack. While the reforms under consideration would bring in billions in additional tax revenue, they would continue the trend of deepening austerity.
In the past, creditors’ expectations of economic rebound amid fiscal tightening have been dashed by reality. The International Monetary Fund, for example, predicted that Greece would see positive GDP growth in 2012 following the first eurozone bailout. Economy output dropped 7 percent that year.
Nothing Short Of A 180-Degree Turn
What makes this time around different is yet to be seen. The Greek economy will have to turn 180 degrees by 2018 for the government to be able to see a healthy 3.5 percent surplus without having to further slash social spending.
Further weighing down the economy is the Greek banking system, which has been on lockdown following capital controls instituted by the government last week. Chock-full of nonperforming consumer loans and bad government debt, Greek banks have been unable to spur business.
“You have to find a way for the Greek economy to function and you need a financial system to do that,” Bosworth says.
On Friday, it emerged that even with a deal, Greek banks will need further life support. Another 10 billion to 14 billion euros would be required to keep the financial system breathing, Reuters reported.
In all, hopes in the near term are tempered by long-term desperation. If a deal is reached, the 320 billion-euro debt currently on the books will continue to weigh on Greece, with issues maturing month after month.
In the proposal, Tsipras requested a discussion of debt "reprofiling" for loans due after 2022. Pushing those payments back would be key to putting Greece back on its feet, Bosworth says. “Everybody agrees there’s no way the debt is repayable. It’s just a question of how the debt will be refinanced.”