Greek Bailout The Grand Illusion

The way to save Greece is not to pump more money into the ailing country, but to restructure its economy, argues Handelsblatt's co-editor in chief.
Greece's reform prospects seem unrealistic right now.

Everything is going according to plan. On Wednesday, Germany's parliament will approve a third rescue package for Greece. The vote won’t even be close. Most legislators will agree to hand over “money in exchange for reforms.” It matters little that the future of Greece, in debt and in turmoil, is unknown. 

The naysayers  within the government don't have enough political weight to overcome the dominance of those coming to the rescue of Greece. But the questions and doubts of the dissenters are valid.

Greece is on its third bailout package, and even the International Monetary Fund (IMF) is reluctant to commit itself to making additional money available for bailing out the euro-zone country. The head of the IMF, Christine Lagarde, warns that Greece's debt is unsustainable and is calling for a substantial haircut.

Her warning is justified. The mountain of Greek debt has grown to €330 billion (or $365.7 billion). That’s about 170 percent of the country's economic output or GDP. With the new rescue package of €86 billion, this figure may jump to more than 200 percent. The European Union’s Stability and Growth Pact allows for an official debt burden of 60 percent of GDP.

Just like the first two rescue packages, the third bailout is above all a restructuring concept for a dilapidated governmental apparatus.

The questions about if and when Greece will be able to pay back the debt are legitimate – and not entirely irrelevant for Germany's chancellor, Angela Merkel. From the very beginning, she made the participation of the IMF a condition for helping Greece. The hesitation of the Washington-based financial institution is weakening Ms. Merkel's position on the Greece issue.

If the chancellor does not want to lose the IMF in a rescue of Greece, she will have to extend the loans’ due dates and lower the interest rates further. There is a lack of transparency in the way there is some talk before the vote in the Bundestag of a sort of “light” haircut, but no lawmaker has an inkling about how expensive these subsequent adjustments will be.

The German government has not presented its citizens and legislators with the entire cost of the new Greek bailout. Instead Ms. Merkel is pinning her hopes on the Greek parliament’s assurances of reform. These promised pension reductions, tax increases, reforms of the justice and education systems, establishment of a strict tax-collection system and liberalization of the labor market are seen as indications of a new willingness to change by Greece's prime minister, Alexis Tsipras.

But anything can be written on paper. Athens' readiness for reform will have to be measured on what changes are actually realized. After the experiences with the first two bailouts, it is right to be wary. The German government is correct in its insistance of strict monitoring of the individual steps of reform.

But even if Greece carries out the agreed-to changes, the question remains about how the country intends to make money and grow in order to be able to pay back the debt. What is Greece's business model?

Despite all the talk, there is still no Marshall Plan for Greece. Among the new bailout billions, no money is budgeted for concrete investment projects. Just like the first two rescue packages, the third bailout is above all a restructuring concept for a dilapidated governmental apparatus. In no way is it a program for a long-term improvement in Greece’s competitiveness. For that, the nation would need a special economic zone. Certain industries would have to be supported with tax breaks and light regulations so that they could help the country achieve long-term growth. In tourism, for example, or in agriculture and solar energy.

Without a modernization program for the Greek economy, no significant private investments will flow into the country, and the third rescue package threatens to become a grand illusion. Greece will be in a position to pay back its gigantic foreign debts only when the nation’s balance of trade achieves a surplus, i.e. the country exports more than it imports. Greece is years away from that happy state.

Those who seriously want to help Greece must provide answers to these intractable questions. Otherwise, the third bailout will not be the last expenditure of billions.


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