A barrage of statements, assessments and policy points that suddenly emerged from Berlin this week regarding the Greek program appears to have dampened expectations by the Tsipras government – as well as the IMF – that the German side will acquiesce to substantive debt relief for Athens this month.
“…the argument that sustainability cannot be achieved without debt relief is not a convincing one,” was the phrase used by Deutsche Bundesbank in its monthly report for May 2017, which was released a few days ago.
Germany’s high-profile central bank emphasized a strict adherence to fiscal targets and a focus on future growth, while at the same time dismissing the necessity for debt relief. Essentially, Deutsche Bundesbank echoed the position by German FinMin Wolfgang Schaeuble.
The same message, more-or-less, has been repeatedly uttered in the German capital this week, namely, that high growth rates in Greece will correspondingly translate into greater decreases in the country’s public debt.
In fact, other German officials detected “political expediencies” as dragging the issue of specific measures for medium-term Greek debt into the limelight.
Schaeuble’s unbending stance collides with the IMF – and Greece – which demands a specificity of measures now in order to guarantee that the Greek debt is sustainable. The Fund has also panned what it calls unrealistic fiscal targets forced on Athens. Finally, the IMF this week unveiled anemic forecasts for Greece’s economic growth extending 40 years into the future.
In the report (page 62-64) for May 2017, the central bank’s analysts write:
“There is no reason why a primary surplus of 3.5% of GDP cannot be maintained in the longer term. In fact, following the successful implementation of a fundamental reform process, this is especially likely to be the case. In the past, some countries have also managed to achieve similar or, in some cases, even higher primary surpluses for extended periods of time (Belgium, Finland and Italy).
“Moreover, the European fiscal rules, which will apply again once the programme comes to an end, stipulate structurally close-to-balance budgets. These provisions require more ambitious primary surpluses when debt levels are higher or interest rates are rising…When the debt ratio falls, these levels can be reduced again. The current programme targets for Greece’s primary surplus are thus in no way too tough and it would not be appropriate to ease them. It is essential to avoid giving the impression that the conditionality attached to fiscal programmes can be diluted if it is politically inopportune.
“Debt relief would also undermine the credibility of programme agreements and weaken the responsibility of the programme country, not least with regard to implementing reforms. Irrespective of this, an agreement may be reached to continue providing transfers due to other political considerations.
“However, the argument that sustainability cannot be achieved without debt relief is not a convincing one. If the programme was to be implemented in full and the fiscal targets reached, this would bring about a continuous decline in the debt ratio and thus re-establish sustainability.”
