As Eurozone finance ministers on Tuesday prepare to gather for a meeting to discuss Greece’s bailout, some officials are once again holding out on approving much needed funds to help the financially-troubled country pay off its debts. Regardless of their reasons, the idea of limiting aid to Greece is different today from previous years and shouldn’t even be an issue, given how increasingly vulnerable Europe’s economy has become.
The architecture of Greece’s series of bailouts in 2009, 2012 and 2015 was conceived by the ‘Troika,’ which includes the European Union Commission in Brussels, the International Monetary Fund in Washington and the European Central Bank in Frankfurt.
The marriage of these vastly different organizations that created the EU-IMF bailout was only ever a civil ceremony— not a match made in heaven. Back in 2012, French President Nicholas Sarkozy railed privately against German Chancellor Angela Merkel’s plan to bring the IMF on board to bailout Greece.
Needless to say, this dysfunction has not improved. Earlier this month, a leaked letter from IMF Managing Director Christine Lagarde warned Greece’s creditors to restructure Athens’ loans, or the Fund would no longer participate in any future rescue package. Another internal IMF discussion hinted at provoking a crisis to force the EU’s hand and compel Eurozone leaders to undertake yet another significant restructuring of Greek debt. Lagarde and the IMF clearly view Athens’ debt position as unsustainable, with sporadic threats of default interspersed with regular bailouts by the EU and IMF. For the Fund, this merely reinforces the widespread perception of financial instability in Europe, while contagion always threatens to spill over into global markets.
The notion of the IMF’s non-participation in the bailout program, especially today, remains an empty threat. Lagarde and German Chancellor Angela Merkel know full well the panic that would ensue on global markets, already rattled by the prospect of a Brexit, anaemic global growth and weak US jobs figures, if the Fund were to withdraw entirely.
This comes as Greece tries to meet a June 7 deadline to repay 299 million euros to the IMF, a relatively small sum. But from this point onwards, the trickle turns into a tsunami, with over 18 billion euros in repayments due in 2016. In June and July alone, over 11 billion euros falls due. In order to access funds secured in the EU’s third bailout package from last July, Athens needs to deliver more structural reforms.
Last weekend, the Greek parliament passed another raft of bills that raised taxes and cut spending, as the constant threat of another Greek crisis has worn the IMF’s patience. The Fund has a sobering view of Greece’s long-term future: Athens’ debt will reach almost 300% of GDP by 2060, unless it receives debt relief.
The IMF’s position today puts Washington on a collision course with Berlin. Wolfgang Schaeuble, Germany’s iron finance minister, has stated he will not countenance variations to the package, citing the difficulties associated with parliamentary ratification. Adding to the complexity, the ECB cannot forgive Greece’s central bank loans.
The ECB finds itself blocked by a German government that refuses to countenance a quantitative easing (QE) strategy similar to the four rounds pursued by the US Fed throughout 2010–14. ECB President Mario Draghi is also hamstrung by the Bank’s charter: unlike the Fed or Bank of England, the ECB is forbidden from becoming a lender of last resort; nor is it permitted to mutualize or assume responsibility for sovereign debt. In theory, the ECB could shoulder all of these burdens, but Eurozone politics means that surplus countries, like Germany and Finland, have no intention of financing deficit economies, such as Greece, Portugal and Spain, who they believe have no intention of repaying their debts.
The IMF-EU dispute will end like all institutional contretemps: with compromise. Eurogroup ministers agreed in mid May that Greece would receive some debt relief, but Germany will oppose the IMF’s insistence upon a debt moratorium. That will leave Greeks in the same suspended animation they have endured since 2009. But the next time Athens is in crisis, it may be too late to resuscitate the patient.
Remy Davison holds the Jean Monnet Chair in Politics and Economics at Monash University in Australia.