Decisions delayed once again over Greece’s bailout

Decisions delayed once again over Greece’s bailout

With the EU preoccupied by an increasingly complex set of problems, Greece has been, for the most part, out of the spotlight since the crises of summer 2015. Now, however, the seven year-long Greek bailout drama is back in the headlines.

The relationships between European institutions, North European governments and Greece itself have recently deteriorated. At the core of this disagreement is an obvious lack of trust between countries such as Germany, the European Commission and the Syriza government in Athens. Greece has eye-watering levels of debt, and years of austerity have caused high unemployment, social unrest and internal devaluation. The IMF, which was not involved in the third (2015) bailout, is now being asked to join the management of the programme.


The European approach is only keeping the patient that is the Greek economy in life support. The EU’s claim that the strategy is working is fanciful: Greece’s recovery – despite having run a current account surplus (before interest payments) in 2016 – has been anemic. The IMF’s gloomy forecast, claiming future Greek debt to be ‘explosive’, has caused a rift with the Europeans. Greece’s creditors are pressurizing a reluctant Prime Minister, Alexis Tsipras, to agree to further tax and pension reforms. These developments have caused Greek bond yields to rise precipitously and a compromise solution is currently being sought.

The IMF is urging debt relief. Clearly such high levels of debt are unsustainable for a country as uncompetitive as Greece: it appears locked into a course that will require repeated bailouts and loans. The EU, however, will not tolerate talk of another debt ‘hair cut’, despite the fact that, whilst the previous relief was not equitable for the various stakeholders, the ECB actually benefited from buying up Greek secondary bonds. Likewise Greece’s government has made little progress on tax reform. The country still has a huge shadow economy and it is estimated that over half of Greek workers are not eligible to pay income tax. This lack of internal reform enrages voters in other European countries. The European ideal of solidarity is currently in short supply.


Tsipras is in a tight spot. His left-wing Syriza government has railed against austerity but his party is now an agent in its implementation. Nevertheless, further cuts to government spending will prove a tough sell to Syriza MPs and could trigger an election. In this instance, it is possible that Syriza would lose and the conservatives of New Democracy, led by Kyriakos Mitsotakis, would form a new government. Mitsotakis made a surprising visit to Berlin on 11th February, meeting with Angela Merkel and Wolfgang Schäuble. Other Greek commentators believe that Syriza politicians are increasingly indicating that they may be prepared to leave the single currency. Pressing the nationalist button is a distinct possibility for the government, which has almost entirely lost economic sovereignty.

Europe’s mainstream politicians can ill-afford more difficult negotiations over Greece’s bailout. Elections loom in France in April, and Germany in September. The EU’s two largest members are experiencing a surge in support for nationalist parties that both reject the Eurozone, and, in the case of France’s Front National (FN), the EU itself. Voters in these countries appear in no mood for further financial assistance to Greece. As a result, leading politicians such as Wolfgang Schäuble have been lambasting the Syriza government, partly in an attempt to outflank the populist surge. The German finance minister recently poured cold water on any suggestion of debt relief, saying “that would not help Greece”, and that “Athens must finally implement the needed reforms […] If Greece wants to stay in the euro, there is no way around it – in fact completely regardless of the debt level.”

There is, however, a glint of light for Greece: the EU may change course regarding the bailout. The IMF recognises debt relief is necessary, which may shift the terms of debate in due course. Meanwhile, the very elections that have caused a hardening of attitudes in other parts of the EU may offer an alternative path. Since gaining nomination as the Social Democratic Party (SPD)’s candidate for chancellor, Martin Schultz has seen a meteoric rise in Germany’s opinion polls. Should the SPD win in September, we would likely see a relaxation of Berlin’s attitude towards Greece. Likewise in France: if opinion polls are to be believed (and after 2016 that is a big if) liberal newcomer Emmanuel Macron would be in a strong position to make the French Presidential run-off, and then defeat the FN’s Marine Le Pen. Macron has previously criticised the harsh terms of Greece’s bailout. There is also the possibility that Brexit may draw the remaining 27 member states into a closer embrace.

If history is anything to go by, the EU will reach a last minute agreement with Greece over its bailout and the proposed reforms. Nevertheless, some more drastic decisions will need to be made to improve Greece’s economic prospects. As ever, political necessity demands a short-term conciliation, but the EU approach simply kicks the can a short way down the road.

Categories: Europe, Finance

About Author

Robert Ledger

Robert Ledger is an analyst on European affairs, with a particular focus on the Balkan and Caucasus regions. He has an MA in International Relations from Brunel University and a PhD in political science from Queen Mary University London.