The Greek negotiators who went to Brussels in mid-February to argue for more lenient terms from their lenders were especially concerned about one thing in any new deal: the target for achieving and keeping a primary surplus. A measure of austerity, it’s what a government earns in taxes each year, minus what it spends on everything except interest payments on its own debt. It’s usually expressed as a share of gross domestic product.
Under its four-year-old bailout program, Greece has dragged itself from a primary deficit of 10 percent to a 3 percent surplus, at great cost in jobs lost. The terms of the bailout demand that Greece reach a surplus of 4.5 percent and hold it for the length of the program. There’s little reason to believe that’s possible.
Since 1995 all the countries of the euro area reached an aggregate primary surplus of 3.6 percent only once, in 2000. That number is back below zero. (Even Germany, the Federal Republic of Austerity, reached its own peak of 3 percent only twice, in the last quarter of 2007 and the first of 2008.) In 2011 the Kiel Institute for the World Economy looked at the records of all Organisation for Economic Co-operation and Development countries from 1980 to 2010. It found that few countries could maintain a 3 percent surplus and almost none could keep a surplus above 5 percent. This suggested a limit to what countries can do, the report concluded. They could cross those thresholds briefly, but “over years and decades, this goal is almost entirely illusory.”
Last year, Barry Eichengreen of the University of California at Berkeley and Ugo Panizza of the Graduate Institute in Geneva found that from 1974 to 2013, only three countries ran primary surpluses of 5 percent or more for a decade: Singapore is an island city-state run by a benevolent autocracy. Norway has oil wealth. For Belgium, the 1990s were a time of growth—Eichengreen and Panizza say countries that hold a primary surplus for many years are likely to be enjoying a good economy, which Greece doesn’t have.
And 4.5 percent is not all that Greece’s lenders are asking. In theory, the country will pay off its debt through thrift and economic growth until it can reduce its debt to the euro zone standard of 60 percent of GDP. To do that, says the International Monetary Fund, Greece must sustain a primary surplus of 7.2 percent from 2020 to 2030. Only Norway has maintained a surplus that high for that long.
The countries that pay off their debt, says Andrew Scott, “tend not to look like Greece.” Scott, a professor at the London Business School, studies the history of government debt. The U.S. and U.K., he says, have survived high levels of borrowing without having to renegotiate with creditors, because both have a history of not defaulting. This allows them to issue long-term debt with low rates. Democracies, Scott says, find it hard to pay off large debts through a primary surplus alone without restructuring. “It’s like a diet,” he says. “You get through January and you’re doing fine. February comes along and it looks like hard work.”
The bottom line: Greece has achieved a primary surplus of 3 percent, but pushing on to 4.5 percent is a long shot.