EU Crisis
31 May 2016

EU Crisis Averted before Brexit Vote

Eurozone deal to Greece averts EU crisis well ahead of Brexit Vote

Under pressure ahead of Britain’s June 23rd referendum vote, policy makers in Brussels emerged from an 11- hour negotiation between the I.M.F. and Eurozone leaders with an agreement that will stave off Greece’s creditors this July. Following the fourth round of rescue loans, Greece increasingly appears to be a leaky vessel in need of frequent bailouts.

In this latest round of aid for Greece, Eurozone finance ministers have approved a loan of 10.3 billion euros, or about £7.8 billion, to be distributed in stages starting with €7.5 billion in late June of 2016. Euclid Tsakalotos, Greece’s finance minister, has welcomed the recent deal saying that it would put an end to the country’s vicious cycle of austerity and recession. He’s hoping the way is being paved for investors to reconsider Greece when the country has been seen to stay the course on the budget targets in the three years ahead. It is difficult to see how, without investor confidence, Greece will reverse what has been a depression-era economic contraction.  While the country’s future is uncertain, the possible crisis of Greece defaulting on its loans in July has been averted. The next storm on the horizon for the Eurozone is the UK’s June 23rd referendum.

Greece has won additional pledges of debt relief, but nothing substantial will be seen until 2018 at the earliest, and only then if it continues carrying out highly unpopular reforms. Greek lawmakers had voted on a fresh set of financial measures aimed at persuading the Eurozone finance ministers to agree to the latest round of debt relief. The austerity measures narrowly passed in a vote of 153 to 145, amid protests outside the parliament. Alexis Tsipras, Greece’s Prime Minister, had galvanized his government coalition to pass the austerity measures ahead of the recent meeting, saying, “Today, European leaders get the message that Greece is keeping its promises. Now, it’s their turn to do the same.”

Austerity Measures

The newest legislature includes an increase in sales tax to 24 percent, plus increased taxes on coffee, alcohol, fuel and other goods. From June 1 the price of a Greek coffee will rise from €1 to €1.30 in many places, another bitter austerity measure to swallow after six years of pension cuts and increased taxes imposed since 2010 when Greece received its first bailout. A privatisation fund has now been created towards putting state assets and utilities such as the post office and the state power corporation on the market, adding to the Greeks’ sense of despair for their country’s future.

Another bill creates a mechanism that punishes Greece by cutting state spending should it fall behind on budget targets set by its creditors for the next three years. Ratings agency Moody’s has said that the “implementation risks” of the recent deal are considered high due to the government’s narrow majority and the constant political and social discontent amongst many Greeks.

Greece: Eurozone’s Weak Link

The I.M.F. has insisted that Greece cannot meet its budget goals and officials expect further challenges to arise in the future. The Eurozone, led by Germany, were reluctant to offer more debt relief to Greece as they are uneasy about asking taxpayers to once again foot the bill for Greece’s financial insolvency.

Greece had provided misleading information to get into the Eurozone in 1981 and didn’t reveal the extent of its indebtedness until 2004, by which time other member states said it had been a mistake to admit the country into the Eurozone. High levels of corruption and tax evasion had long undermined Greece’s finances, providing the shaky foundation that couldn’t stand up to the global credit crunch.

Greece was slow to implement the vital austerity changes that it had been urged to take. Now, after six years of grueling austerity and a deep economic crisis, half of Greece’s young are out of work and reports of pensioners supporting their whole families have become commonplace.

Costly Refugee Crisis Amid Recession

To exacerbate Greece’s financial challenges, the refugee crisis has cost the country an average of €600 million a year. With the pressure off Greece to find the money to pay its creditors, for the time being, the country groans under increased austerity with little hope for the deep economic recession to lift this year. Unemployment has remained at over 25%, and Greece owes more than 300bn euro, which is 180% of its GDP, figures that IMF and the Eurozone had seen as unsustainable.

With one Greek in four unemployed, and average monthly salaries at €711.00 (or £542.00), it’s little wonder Greeks are resisting paying higher taxes on basic goods like coffee. Average monthly rents for a family in an Athens flat come to €457 and utilities average €152 a month, leaving a little over €100 for food and other living expenses. Given Greece’s own economic hardship it is remarkable that many of those who are under employed are using their free time to volunteer. Collecting food and clothing donations, many Greeks feel solidarity with the refugees they are assisting.