Greece

Greece's Euro Membership Looks Vulnerable Again

There's a growing risk of a default in Athens.

He deserves a break.

Photographer: Jasper Juinen/Bloomberg

Greece is caught in a spat between its major creditors. On one side is the International Monetary Fund, which says "significant debt relief" is needed. On the other are the euro-zone institutions, insisting on a primary budget surplus of 3.5 percent of gross domestic product and no further relief. Something's got to give -- and it could be Greece's euro membership.

Two deadlines -- one hard, one soft -- are looming. The soft deadline is the Feb. 20 meeting of euro region finance minister in Brussels; the hard deadline comes in July, when Greece's monthly debt repayments increase to about 8 billion euros ($8.5 billion).

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With next month's Dutch election to be followed by French and German votes, it's clear that the longer the tussle drags on, the less political appetite there'll be to resolve the situation. But with both sides in fundamental disagreement, it's hard to see how a compromise can be engineered. The European Commission said on Tuesday that there's no date set for talks to continue. In short, Greece remains in limbo.

Here's what the IMF said in its latest assessment of the Greek economy, published last week:

Debt relief alone is also not sufficient to address Greece’s policy challenges. This is why a two-pronged approach is required for Greece to return to sustainable growth and prosperity: ambitious policies on the part of the Greek authorities and ambitious debt relief on the part of Greece’s European partners.

German Finance Minister Wolfgang Schaeuble, though, is adamant that additional debt relief isn't on the menu. Here's what he told German broadcaster ARD on Wednesday:

We can’t undertake a debt haircut for a member of the European single currency; it’s ruled out by the Lisbon Treaty. For that, Greece would have to exit the currency area. The pressure on Greece to undertake reforms must be maintained so that it becomes competitive, otherwise they can’t remain in the currency area."

While the point about debt forgiveness being forbidden is strictly true, it’s also true that the euro zone is capable of finding plenty of wiggle room in the treaties when it suits. Moreover, the IMF is talking about extending repayment terms, rather than an outright debt haircut where principal payment is reduced. Schaeuble, who has a habit of mentioning the prospect of Greece leaving the euro at every available opportunity, glosses over those elements of the IMF's case.

Klaus Regling, the head of the European Stability Mechanism, chose to ignore Schaeuble's grumbling when he argued in the Financial Times last week that the euro zone is united on Greece:

In May 2016, Greece’s euro zone partners pledged additional debt relief at the end of the ESM program in mid-2018, should there be a need for it. And in the long term, they have committed to even more help, provided that Greece sticks to its side of the bargain. It is hard to overestimate the significance of this pledge, made by the finance ministers of the euro zone. Solidarity with Greece will continue.

If that sounds unconvincing, the solidarity Regling claims that Greece enjoys will be in even shorter supply in election season. And while the crisis drags on, the Greek economy is suffering with figures released on Tuesday showing gross domestic product shrank by 0.4 percent in the fourth quarter of 2016, compared with economists' expectations for an expansion of 0.4 percent.

I've argued before that Greece should have left the euro already. The country's euro partners, preparing for Brexit negotiations and a series of potentially destabilizing elections, are unlikely to risk further turmoil now by trying to boot Greece out. Nor does Greece want to leave.

But Europe's election season will soon be upon us, as will that hard deadline of July's debt payment. A Greek default would almost certainly be incompatible with continued euro membership. The IMF and the EU institutions need to resolve their differences swiftly, hopefully with an agreement to further ease the nation's debt burden. Otherwise, the risks of Greece leaving the euro are rising.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Mark Gilbert at magilbert@bloomberg.net

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    Therese Raphael at traphael4@bloomberg.net

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