Sisyphus and the Danaids

Last week, after a series of dramatic ups and downs, an agreement on a new stabilization program -- the old one had a very short life before being thrown into the trash -- was finally reached between Greece and the Troika, a coalition formed by the EU, the International Monetary Fund (IMF) and European Central Bank. The agreement can be summarized as three main parts: private debt relief of roughly 100 billion euros, 130 billon euros of fresh funds guaranteed by the EU and, in return, severe fiscal discipline together with dramatic wage deflation. The stabilization program has two main objectives, with the aim of keeping Greece in the eurozone: to make the Greek public debt sustainable in the long run by shrinking the budget deficit, and to put the Greek economy on a growth path by restoring the huge loss of competitiveness.

Is this gigantesque mission realistic? From the beginning of the Greek debt crisis, I argued in my writings that there is no solution to the crisis but the exit of Greece from the eurozone. Indeed, there were two options on the agenda: The first one was a return to the drachma -- Greece's currency before the euro -- in order to restore competitiveness and pave the way for growth through high devaluation while imposing severe fiscal discipline. As part of this option, a much larger debt relief package should and could have been considered as the price to pay for mitigating the Greek threat to the eurozone. I think it would have been easier for the Germans to accept paying this price. I am not saying that the exit option would be any less painful for Greeks or technically less difficult, but at least it would work. However, I am doubtful that the second option -- the stabilization framework that is in place now -- will work. Do not forget that a devaluation does not have a recessionary effect like wage deflation as it only increases import prices relative to domestic prices, while wage deflation hurts domestic demand as well as imports.

Before the last European summit on Greece, a short report on the state of the Greek economy, dated Feb. 15, was released. According to the Troika economists, “there are notable risks” which make the success of the new stabilization program uncertain. The baseline scenario foresees a return to growth in 2014 following a year of no growth in 2013 and a primary surplus – rather than the current deficit -- after 2014, which is expected to reach 4.5 percent of gross domestic product (GDP) in 2017. Last but not least, services worth 46 billion euros should be privatized according to the baseline scenario. I would like to note that the Greek economy contracted by 6 percent last year, while the forecast for this year is for a further contraction of 4.3 percent and the primary budget deficit to be 1 percent of the country's GDP.

To achieve these objectives, the average nominal wage level must be decreased by more than 20 percent, and 150,000 layoffs should be made in the public sector over the next five years. However, Greece will hold general elections in April. Surveys show that support for New Democracy and PASOK, the two parties supporting the stabilization program, is limited to a combined total of roughly 40 percent. The political risk is obvious, but even if a political meltdown can be avoided, the program, which stands on a knife edge, may still collapse. According to the Troika report, the debt trajectory is so sensitive to deviations from the targets that “the program could be accident prone.” I think that an accident is highly probable given the social consequences of harsh belt-tightening and the very poor governance capability of the Greek administration. Recently, when German Chancellor Angela Merkel pointed out that “success is not 100 percent guaranteed,” she must have had this highly probable accident in mind. What will happen if the accident occurs? Put simply, Greeks, already deeply impoverished, will be asked to make greater sacrifices. Here, Sisyphus appears on the scene.

Nevertheless, a second consequence of the accident has to be considered. The Greek public debt to GDP ratio will continue increasing and approach 180 percent, instead of decreasing to the 120 percent desired, and extra funding will be needed. Troika economists are estimating “the financing needs through 2020 to reach perhaps 245 billion euros.” “Perhaps”? You can be sure that more funds will be needed. Here, the Danaids, with their leaky barrel, join Sisyphus on the scene.