Greece’s Dangerous Budget Surplus

The government has plenty of cash, but the economy is sputtering. The latest bailout looks set to fail.


Greek Prime Minister Alexis Tsipras European Eastern Partnership summit in Brussels, Nov. 24.
Greek Prime Minister Alexis Tsipras European Eastern Partnership summit in Brussels, Nov. 24. PHOTO: POOL CHRISTOPHE LICOPPE/ZUMA PRESS

At first glance, Greece’s traumatic 2015 bailout—its third in five years—appears to be working. The government’s budget is back in surplus, excluding debt service, after the years of deficits that contributed to the country’s first crisis in 2010. The radical leftist prime minister, Alexis Tsipras, now touts the “restoration of Greece’s fiscal credibility.” As recently as 2014 he savaged his predecessor, who achieved much lower surpluses, for “austerity.”

The only problem is that the bailout is not in fact working, if you think the goal should be to restore Athens to sound public finances and to offer Greeks economic hope for the future.

The European Commission’s autumn forecast predicts eurozone economic growth of 2.2% this year, the fastest in a decade. But Greece is falling further behind. It was originally projected to grow by as much as 2.7% in 2017. Six months ago, the EU’s number crunchers reduced that forecast to 2.1%. Last month they cut it further, to 1.6%.

This anemic performance is caused both by excessively demanding fiscal targets and by persistent structural impediments to investment. On both fronts, Greece’s creditors are complicit in the country’s continuing woes. 

The 2015 bailout requires that the primary budget surplus rise to 3.5% of gross domestic product in 2018 and for the four subsequent years, from 1.75% of GDP this year. During Mr. Tsipras’s premiership, the surpluses have been achieved primarily via tax increases and deep but haphazard cuts in public spending without enough thought for the economic consequences of specific budget decisions. The drag on growth is even greater, because creditors distrusted Athens so much that they insisted on specific budget cuts far exceeding what was needed to hit targets. Greece’s primary surplus last year reached 4.2% of GDP, versus a target of only 0.5% of GDP, and the economy continued to shrink.

Meanwhile, the bailouts haven’t managed to clear the institutional and political minefield prospective investors have to cross if they want to invest in Greece. Investment has collapsed in the country, to 11% of GDP last year from 26% of GDP in 2007.

Mr. Tsipras has urged his ministers to speed up approval procedures for investment projects and even set up a task force for this purpose. But his pro-investment rhetoric is at odds with the ruling Syriza party’s deep ideological biases, and there is reason to doubt both the willingness and the ability of the government to change its spots.

The interminable delays in Hellenikon, the development of the former airport that is one of the biggest real-estate projects in Europe, are a case in point. As an opposition politician, Mr. Tsipras led demonstrations against the development of the area. As prime minister, he has embraced it. Three years after the sale of the property was completed, however, work has yet to begin there. Last month, Lamda Development , the main investor, released a statement decrying “changes and inconsistencies, as well as the habit of constantly creating fresh obstacles,” which it said “naturally undermines the necessary climate of trust” and “raises serious questions about the ability to materialize the investment.”

A bitter dispute continues between the government and Eldorado Gold, a Canadian mining group, whose operations in the northern Chalkidiki region were the biggest foreign investment in the country during the crisis. The group recently announced a freeze in operations in its Skouries mine because of persistent delays in permit issuance, and has appealed once again to the Council of State, Greece’s top administrative court. Syriza took up the antimining cause while in opposition, and the government has continued to make life hard for the group’s local subsidiary, even though the company has won 18 cases at the Council of State.

Meanwhile, the government persists in harassing Beat (formerly Taxi Beat), one of the most successful Greek startups, which was sold this year to Daimler for $43 million. In late September, details emerged of a bill being prepared by the Ministry of Infrastructure and Transport, which would effectively have spelt the end of Beat as a service by forcing the company to become a “provider of transport” and to sign employment contracts with some 8,000 drivers currently using it in Athens. The politically influential head of the Athens taxi-drivers union has criticized the rating feature of the app, saying that it made drivers similar to “the prostitutes on display in Amsterdam.” The final version of the bill relaxed these terms, but the minister, Christos Spirtzis renewed hostilities, claiming falsely that the company, which is still based in Greece, “did not leave a single euro” to the Greek economy.

The bailouts are creating a dangerous situation in which the government has enough cash to meet its debts but no one else in Greece can thrive. That spells an early demise of the recovery, and new questions about Greece’s viability inside the eurozone. The creditors need to think harder about that danger, beyond the short-run benefits of the end of the bailout era.

Mr. Palaiologos is a journalist at the Kathimerini newspaper in Athens and author of “The Thirteenth Labour of Hercules ” (Portobello Books).

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