Past Publications

November 16, 2016

Greece: A Clear Roadmap for Debt Relief is Needed

Questions for George Papaconstantinou

Greece recently completed its first review of the third bailout program agreed on in 2015 with European lenders. Its government has pressed to put talks on debt relief back on the Eurogroup’s agenda. The former finance minister reflects on the current political and economic climate in his country after the fall 2015 parliamentary elections, the current state of implementation of reforms, the likelihood of debt restructuring for Greece, and the lessons the eurozone has learned from the Greek crisis.


George Papaconstantinou served as Greece’s minister of finance of Greece from October 2009 to June 2011 under the government of former Prime Minister George Papandreou. In that position he was active in the Greek crisis, negotiating the first bailout with Greece’s European partners and the IMF. His new book "Game Over: The Inside Story of the Greek Crisis" was published in May 2016.

More than a year after the last parliamentary elections in Greece, how stable is the Greek coalition government of Prime Minister Alexis Tsipras?

George Papaconstantinou: The coalition is more stable than one would have thought given the fundamentally different characteristics of both partners – the radical left SYRIZA and the populist right Independent Greeks. Both sides have demonstrated that they can cooperate well and their coalition has proven to be robust. In fact, the recent reshuffling of the cabinet has highlighted that Tsipras is wedded to and dependent on his coalition partner. This is shown by the fact that, on issues outside of economics – i.e. foreign policy, human rights, the refugees, the relation between Church and State – he has had to agree to the extremely conservative and reactionary positions of the right-wing populists.

Looking at SYRIZA’s internal cohesion, Tsipras is in control of the party despite the fact that he is implementing a very different economic policy from what he promised. The most vocal opposition within his party left before the elections last September, and the remaining opposition, led by Finance Minister Tsakalotos, is making noise but is not about to challenge him or his decisions. The pressure for the parliamentary group from the actual constituencies however will increase because there will come a point where MPs can no longer justify the unpopular decisions taken within the framework of the third bailout. But despite many disagreements, there is no immediate threat to Tsipras from within his party. This means that even though he is increasingly unpopular and now behind in the polls, he is unlikely to lose his parliamentary majority any time soon.

In August 2015, eurozone countries and Greece agreed to a third bailout package. Has the country returned to a path of economic and fiscal consolidation since then?

The country was on the path of economic and fiscal consolidation in late 2014 before Syriza came to power and paid a heavy price for the new government’s ineptitude in the first half of 2015 and for the referendum. In fact, the third bailout was not necessary and could have been avoided. And even though some parts of it have been implemented, a real sense of normality has not returned. In my view, the most dangerous scenario for Greece is that, with the country in a situation where it no longer poses a threat to the European project, the creditors may just let it rot away in the corner with minimal help – instead of taking major decisions such as the one on debt relief and giving it an additional push to get it out of the crisis.

How would you assess the Greek government’s performance in implementing the reforms agreed in the third bailout package? How do its European partners perceive Greece’s efforts?

On the fiscal side, implementation is advancing. However, even though many aspects that deal with increasing taxation meet the demands of the creditors, they are harming the economy. What is not advancing at the same rate is the structural side, where we can observe a lot of back and forth – from privatizations, to reforming the state, to opening up the business environment. In this area, given SYRIZA’s reluctance or even outright hostility to undertaking any kind of structural reform, there is no progress preventing any kind of signaling of ownership to the outside world. This is absolutely necessary to regain the confidence of international investors.

Against this background, overall, the European Commission seems to be more positive in its assessment of the performance of the Greek government than many of the member states. This has to do with the fact that a lot of the member states are reluctant to move on the debt issue, raising the bar for the Greek government. The Commission, on the other hand, is solely focusing on the boxes of the program being ticked, and most of them are. To me, however, there is another aspect outside the program that is very important. It has to do with the independence of institutions in Greece, especially of the judiciary and of the media. Even though this aspect is not strictly speaking part of the program, there is a lot of regression, and it partly influences the negative assessment by European institutions and countries.

Debt restructuring remains a highly contested issue for the Greek government, European lenders, and the IMF. What are the reasons for this, and what is the likelihood of reaching an agreement before the 2017 elections in France and Germany?

It is important to understand that debt restructuring, or debt relief more generally, has two dimensions. Over the next ten years, debt servicing is manageable and this is the period that the German government focuses on when it says there is no rush to come to decisions. However, beyond that there is a medium-term challenge with an immediate impact, because it is necessary to send a signal to investors regarding the overall sustainability of Greek debt. This is why it is urgent to see decisions made, even though the Greek government will be able to service its debt on a cash basis and on a repayment basis in the coming years.

At the same time, I am one of those who do not think that debt relief is the Holy Grail – even though I believe it is necessary and that decisions should be taken now. Institutional and structural reforms are as important as decisions on debt relief. Considering the political calendar, of course, I have some difficulty seeing any decisive action taking shape before the elections in Germany, which is unfortunate. I hope at least for a step forward, with some decisions now on the short-term measures as in last year’s agreement, and in developing a clear roadmap for how to proceed after the German elections.

Has the eurozone drawn the right lessens from the Greek debt crisis? Could the structural flaws of the monetary union be sufficiently fixed, and is the eurozone now better prepared for the next crisis?

In the beginning of the Greek debt crisis, the eurozone was in denial. It then acted like a firefighter and only slowly started to understand the systemic nature of the problem, hastily moving to repair the institutional architecture of the euro. However, fixing the flaws of the common currency is still a work in progress – both in terms of creating a fiscal union, where we have not made much progress, and in terms of realizing a banking union, where we are closer but not yet there. So while some progress is being made, I still do not think that we have created a robust environment. Moreover, the eurozone falls short of addressing the broader political lessons of the Greek debt crisis. The implosion of normal politics that we have seen requires answers that extend beyond the institutional architecture of the eurozone and are more political in nature. And there, I think, we have not done very much.


This interview was conducted at the DGAP on November 8, 2016 prior to a panel discussion entitled “The Greek Debt Crisis and the Eurozone: Lessons Learned for a Common Future?” Daniela Schwarzer, the DGAP’s Otto Wolf Director, chaired the panel, whose participants were George Papaconstantinou; Wolfgang Merz, head of the Europe division at the German Ministry of Finance; and Jens Bastian, an independent economic and investment analyst. The event was co-organized by the Alfred von Oppenheim Center for European Policy Studies and the Friedrich Ebert Foundation.

The questions were posed by Julian Rappold, program officer at the Alfred von Oppenheim Center for European Policy Studies.

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DGAP Interview (November 21, 2016)

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