By Vassilis Kostoulas
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EU Commission Vice-President Valdis Dombrovskis took a distinctly sober view of the Greek debt issue, in an interview with "N" this week, urging all sides to have realistic expectations, but at the same time appearing confident that an agreement can, indeed, be achieved at the upcoming Eurogroup meeting.
Dombrovskis, who holds the economic, monetary affairs and euro portfolio, emphasized that "sometimes it is about the expectation management – if we set expectations too high, it is normal that we need to align them to what is politically and technically possible."
With speculation running rampant in the wake of the failed May 22 Eurogroup to bridge differences between the IMF and European creditors - primarily Germany - over the Greek bailout, the no-nonsense Latvian Commissioner said the framework for discussion of debt relief measures for the country still revolves around a Eurogroup statement dating to May 2016.
EPA
He cited the fact that the Greek government has already taken most of the 140 "prior actions" demanded by creditors, as of this month, and is in the process of implementing the remaining ones.
"Once it is done, the institutions will be able to table the final compliance report. Second, work will continue on the debt issues," he told "N".
Moreover, in again accentuating the positive, Dombrovskis said he detected progress in talks over fiscal targets after the current program ends in August 2018. For instance, he said the demand for an annual primary budget surplus target of 3.5 percent (of GDP) will extend to 2022, rather than the original proposal for a 10 year period, i.e. until 2027.
Finally, he sidestepped a question on what the European institutions would do in case the IMF continues to remain outside the bailout program, merely stressing that "Plan A" is still very much on the table, given that " Greece is delivering".
Has the Greek Government done what it takes from its side to reach to an agreement, or are there still loose ends? What are they?
Yes, there is a clear commitment from the Greek government to succeed with the second programme review and get the country back on its own feet. On the fiscal side, Greece has overperformed last year and is well placed to reach the primary surplus targets for this year and the next. This has happened together with a very comprehensive, deep and often difficult reform package. We don't underestimate the political capital invested in this, and the courage it takes. Now indeed, with Greece delivering, it is important we reach an agreement swiftly and move forward with the disbursement of the next tranche.
What is, in your opinion, the solution to which especially the German finance ministry and the IMF can agree, regarding the medium-term interventions on the Greek debt and the targets of the primary surpluses during the next years?
It's worth noting that the European Commission is not one of Greece's creditors – the euro area Member States are. It is for them to decide what can be done in terms of debt measures. Our role, which we take up actively, is to facilitate that debate.
That being said, there is awareness across the board that we need a swift conclusion, as the delay in the review has started to negatively affect the Greek economy. It is key to agree on a credible package on debt sustainability and the primary surplus path, in order to enable Greece to re-enter the markets and successfully exit from the programme in 2018. As regards the primary budget surplus targets, progress is being made. As the Eurogroup president reported after the last Eurogroup, the requirement of primary surplus of 3.5% of GDP should remain for five years, till 2022, instead of the ten years envisaged initially.
Is the dispute on the debt so far only between the Eurozone and the IMF, or is the Greek side raising issues that make the process even more complex?
The work is on-going within the framework set by the Eurogroup statement of May 2016. I am hopeful for the outcome and the possibility of an agreement in the next few weeks. Sometimes it is about the expectation management – if we set expectations too high, it is normal that we need to align them to what is politically and technically possible.
Why has the completion of the second review delayed so much and how has this affected the Commission's economic forecasts for Greece?
The delay has indeed affected the growth prospects. In February, we forecast that Greece would grow by 2.7% in 2017. Now, in the spring forecast, we have revised that growth projection down to 2.1%. It is key to conclude the second review swiftly,so as to underpin confidence and support the recovery. During the three consecutive support programmes, Greece has strengthened its economic fundamentals and the positive reform effects are already kicking in.
What is the deadline for an overall agreement?
Ideally, next Eurogroup. This is our target date. Work is ongoing on two fronts. First, while the Greek government has already taken the vast majority of the 140 Prior Actions, and the remaining are being implemented as we speak. Once it is done, the institutions will be able to table the final compliance report. Second, work will continue on the debt issues.
What is the plan B regarding the disbursement of the installment in Greece, if the IMF is not convinced to participate in this phase with funding in the program?
There is a preliminary agreement by all institutions on the policy package with all institutions. Greece has already adopted a significant package of measures and progresses with the remaining Prior Actions as we speak. Greece is delivering. The Eurogroup welcomed the strong policy package and held in-depth discussions on the debt issue. This is a complex matter which requires agreement on numerous parameters. Work now continues with a view to reaching a definitive conclusion at the next Eurogroup meeting on June 15. We do believe at the Commission that the closure of the second review is within reach. So we stick with Plan A.
The Greek Parliament, with the votes of the governmental majority, approved financial measures of 2% of GDP to be implemented after the end of the program, i.e. after 2018. Since these measures concern the current program, why are they not being applied under the current program? Or is this a new, complementary program?
These measures are part of the agreed policy package. They were necessary to reassure all programme partners that the medium-term budgetary targets will be achieved also after the programme. But, provided that the Greek economy develops in line with current forecasts by the European institutions, expansionary measures will kick in in parallel and policy package would be fiscally neutral, rebalancing the existing policy set in a manner that strengthens growth and social protection.
In 2016 Greece achieved an 8-fold higher primary surplus than the target. This strengthens the credibility of the Greek state, but it is ejecting significant resources from the economy, which has nearly 7 years of recession on its back. Why was there such an enormous deviation from the initial target? Has the planning of the measures been inaccurate and is there excessive taxation on the real economy?
Indeed, we have seen a major overperformance. It shows that our projections are not overoptimistic and that IMF projections were on the pessimistic side. This provides an extra argument to convince the IMF on future developments. There are several factors behind this overperformance. First, growth turned out to be stronger than projected. Second, further reforms enacted in previous years are working and bringing results. Finally, there were also some one-off effects that contributed to the primary surplus, such as frontloading of certain tax measures. So there is a permanent and temporary part in this over-performance, but overall it is a positive argument behind the implementation record of Greece.
Should the fiscal adjustment be derived from raising taxes or rather cutting expenditures? The problem in Greece is that a large part of public spending ends in the provision of pensions, although many are early pensions. But, for this reason, employers and employees are faced with increasing tax burdens which undermine growth. What is your opinion?
This is why there was a comprehensive pension reform and work on introducing a proper social safety net with – for the first time in Greece’s history – the minimum income guaranteed income scheme rolled out at the beginning of 2017. Provided that the European institutions are correct and Greece remains on track to meet its fiscal targets, growth-enhancing measures for the post-programme period actually foresee cuts in personal and corporate income taxes as well as the real estate tax, rebalancing the package at the end of the day. Social protection is also strengthened through an increase in targeted social benefits aimed at broader groups in society (housing allowance; child allowance; school meals; nursery/pre-school education; reduction in health co-payments).
The country still holds a particularly low position in competitiveness ratings, and the level of exports, in the best of cases, is not creating enthusiasm. How is the implementation of structural reforms in Greece progressing?
Effective reform implementation is always a weakest link, not only in Greece but also in other countries. It is not enough to legislate, the reforms need to be timely and effectively implemented. Speaking specifically about Greece, the lack of implementation or delayed implementation of reforms held back the recovery. This is why the current support programme for Greece includes a strengthened component of technical support. And this support is provided virtually in all areas of reforms undertaken. Of course, at the end of the day, it is for the Greek authorities to make best use of the assistance received and progress swiftly with the implementation.
If any Greek government presented to the institutions a brave program of structural reforms, with the central element being the improvement of the business environment to attract investment and create jobs, would the institutions give consent to greater flexibility in the budgetary targets? Οr do the institutions approach these two fields as two independent fields?
Indeed, making easier to do business, making the country more attractive to investors, tackling barriers to investment, easing regulatory burden for businesses is one of the main reform directions that we recommend not only for Greece but to many European countries.
I am confident that like several other countries in Europe, Greece can turn around its economy. Ireland has done it, the Baltic States too, Spain, Portugal – Greece can do it. You have endured one of the most profound economic crises. It has brought around immense challenges and dented confidence, not only of the investors but also of Greek people.
This is why it is so important to ensure an investment and business friendly environment to attract capital, to provide conditions for the innovation to thrive and for the businesses to develop and create jobs. These elements are key parts of the broad-based policy package under the ESM programme, and they should be implemented by the authorities with full ownership.
As regards fiscal targets, they are being revised - as I already mentioned – towards a shorter term.
Of course, one of the important elements of macro-economic and fiscal stability is putting debt on a downward path.
Will the Greek state return to the markets until the end of the program in 2018 or will a new program be necessary?
That is the point of the ongoing programme. Greece is making enormous efforts to conduct the reforms necessary to modernise its economy and public administration and secure financial stability. And those efforts are delivering, as we saw throughout 2016. We are confident that these will help the country ensure market confidence in the years to come.
