Greek Prime Minister Antonis Samaras won the June general election promising to renegotiate the terms of the Memorandums of Understanding (MoU) that accompany the two EU/IMF bail-out deals (worth a total of €240bn) that Greece has to implement to avoid sovereign default. The cornerstone of this renegotiation plan is to ask for an extension of fiscal targets by at least two years, from 2014 to 2016; these targets require the government to come up with additional budget savings of around €11.5bn focusing on cuts to state pensions and salaries.
Economic depression persists
The need for renegotiation is obvious: the Greek economy is in its fifth year of depression, with the economy contracting by almost 17% in real, seasonally adjusted terms between its pre-crisis peak in the second quarter of 2008 and its latest trough in the second quarter of 2012. The unemployment rate has climbed above 23% (and above 50% among young people). Given the deeper-than-expected depression the government now thinks that savings of €11.5bn would not even be enough, but that the cuts would have to amount to around €13.5bn (around 7% of GDP) to compensate for lower tax revenues and higher social-security costs. However, further austerity is becoming economically, socially and politically unacceptable.
Tentative diplomatic efforts
Against this backdrop, this week--around two months after the election--the Greek government is taking its first tentative steps to live up to its election campaign promise to ease the fiscal burden on the economy and its people. Mr Samaras' diplomatic efforts this week include meetings with Eurogroup president Jean Claude Juncker yesterday (Wednesday, August 22nd), German Chancellor Angela Merkel on Friday (August 24th) and French President Francois Hollande on Saturday (August 25th). Undoubtedly, the meeting with Ms Merkel is the most crucial given Greece's attempts to convince the creditor countries (with Germany the biggest among them) that Greece needs extra time to implement the tough fiscal agenda. Indeed, ahead of the meetings Mr Samaras told the German daily Bild that Greece was not asking for more money from its creditors but that it needed a bit more "breathing space" to implement the budget cuts. However, such statements risk alienating Greece's impatient EU partners even further: the Greek government itself has acknowledged that a delay of fiscal targets by two years would create a financing hole of around €20bn (probably even larger). Under current circumstances (with Greece cut off from international bond markets) this means that there would indeed be the need for another bail-out by 2014, albeit smaller than the previous two ones (€110bn in May 2010 and €130bn in March 2012); even the country's relatively successful issuance of expensive short-term Treasury bills (which recently helped to avert a cash-flow crisis) would be unable to bridge such a big financing gap.
Therefore, the government knows that its chances of convincing its international lenders, especially Germany, to extend the deadline for fiscal targets are slim, but it has to try given the domestic political scene, with the austerity-fatigued electorate expecting results on the renegotiation front and a strong anti-austerity opposition in parliament constantly attacking the government. For example, after the new government announced in July that it would focus on bringing the MoU back on track (with Greece missing more than 200 MoU targets) before asking for renegotiation, the left-wing, anti-austerity Syriza party suggested that many Greek voters' worst fears had become reality and that the three-party government was backtracking on its election promise.
Weak prospects for renegotiation
But renegotiation is extremely difficult against an increasingly sceptical international backdrop, with the bail-out-fatigued international lenders insisting that Greece should deliver results on the austerity front before any new concessions can be made. The troika of international lenders (the European Commission, the European Central Bank and the IMF) will publish a long-awaited report in September on whether Greece is in compliance with its second bail-out agreement. A negative assessment could mean further delays to Greece receiving a vital €31.2bn loan tranche, making a Greek disorderly default and eventual euro exit more likely.
Indeed, Ms Merkel and Mr Juncker have already underlined that there will be no decision on fresh aid to Greece until after the troika will have delivered its report next month. In his meeting with Mr Samaras Eurogroup chief Juncker reiterated his opposition to Greece leaving the euro zone--he is aware that a 'Grexit' could lead to a domino effect that could destroy the whole euro area. Similar sentiments have been expressed by other EU leaders in the past, notably Ms Merkel and Mr Hollande, but this does not mean that Greece's demands for leniency will be met. Facing a general election next year, Ms Merkel has to balance increasing opposition at home to further financial aid to Greece (both from within her own centre-right party and the electorate) on the one hand, with remaining committed to the euro project--which has benefited Germany's economy--on the other.
Ms Merkel's strategy remains "buying time" in the short term (without committing too much taxpayers' money to euro rescue deals), insisting on fiscal consolidation and structural reforms in indebted countries, while gradually transforming the euro area into a more robust fiscal--and eventually political--union in the long term. However, in the meantime, Greece remains trapped in a self-defeating cycle of ongoing austerity and economic depression that make it unlikely that Greece will be able to repay its debt unless there is major further debt relief from its international lenders. The survival of Mr Samaras' fragile three-party government, which consists of two left-leaning parties that are sceptical of further austerity, will therefore be severely tested in coming months. Syriza leader Alexis Tsipras, who has a much more confrontational style than Mr Samaras, is already waiting for his chance if the current government collapses.