Reforms are not a must and growth doesn’t pay! Going by reports in the media, this sums up the latest proposals for the Greek case coming from the French government and the euro rescue fund, the ESM. On the one hand, very comprehensive interest payment deferrals, interest rate limits and extensions of earlier bail-out loan repayment periods are proposed. On the other hand, Greece is to be exempted from debt repayment if the average growth rate over five years falls below 2.8%. Greece could well fail to meet this target in the next few years considering the periphery country’s structural challenges, such as for example its inefficient administration and its heavily-indebted banking sector. In 2017, i.e. many years after the beginning of the crisis, the Greek economy is still having a hard time gathering momentum. At the same time, the plans from France and the ESM make no mention of binding reforms as a condition for debt relief measures. So the lack of incentive for the Greek government would be inevitable: Greece’s EMU creditors bear the debt burden and it is not worth pursuing a painful, growth-promoting structural policy as ultimately it would only mean another financial burden.
France has put its cards on the table as regards Greece and now it is up to Germany to react. Paris, Athens and other EU countries are hoping that a more accommodating fiscal stance could be adopted after the change of government in Berlin. With the new Merkel administration already having spoken out in favour of more transfer payments to Brussels, a social democratic finance minister could also be more open to debt relief measures – so goes the expectation. But the new finance minister in the German cabinet is also unlikely to agree to unconditional fiscal relief for Greece as the German public would not approve of unconditional concessions. At the latest at the end of April the new German government will have to put its cards on the table as the Eurogroup will then decide on how to deal with Europe’s Greek problem child in the future.