Euro zone finance ministers gather in Brussels today for the first eurogroup meeting of the year which is likely to be dominated by Greece.
The first anniversary of last January’s Greek general election is approaching, an event that shattered the European political landscape.
The victory of Alexis Tsipras on January 25th ushered in a period of instability, culminating in a bitter battle over a third bailout package and pushing Greece to the brink of a euro zone exit.
Six months later Greece is back on the agenda. The period since the negotiation of the third Greek bailout has been relatively subdued.
Tsipras’s decision to go to the polls in September proved wise. The subsequent general election – Greece’s fifth in six years – served to purge Syriza of its most radical left members, who unsurprisingly railed against their party’s acceptance of a third bailout. Tsipras emerged stronger, managing to retain the support of his electorate, according to opinion polls, as they saw their prime minister as a victim of euro zone oppression rather than a leader who had reneged on his electoral promises.
Demanded by creditors
Relations with creditors have been relatively cordial since September, when negotiations began on reform measures needed to unlock bailout funds. In December, parliament passed a number of “milestones” demanded by creditors, including further measures to liberalise the energy sector, and a new law allowing investors to buy non-performing loans. There was also relatively good news on bank recapitalisation. While the capital controls introduced in June are still in place, ECB stress tests on Greek banks revealed the amount of money needed from the ESM fund for bank recapitalisation would be €10 billion, rather than the €25 billion initially allotted. The recalculation is likely to reduce the overall size of the Greek bailout from €86 billion to just over €70 billion.
But as the new year starts and the reality of a third bailout programme begins to bite, challenges are looming.
Next week, the first review mission under the third bailout programme is due to begin. Originally expected before Christmas, it has already been delayed and will stretch at least into next month. Among the most contentious conditions being demanded by creditors is reform of the pension sector, which EU officials still describe as the most expensive pension system in Europe. Greek negotiators have delivered a 170-page pension document – in Greek – to Brussels in advance of the review mission which officials are now wading through. So far the reaction appears to be relatively positive from lenders, who have welcomed, in particular, proposals to merge the state's six pension funds into one.
Fiscal targets
What may prove even more difficult for Greece are the fiscal targets demanded by lenders. In the immediate term, Greece needs to provide a supplementary budget for this year. The institutions are also looking for medium- and long-term budget targets for next year and beyond. Arguably more worrying for Syriza are developments on the domestic political stage. The surprise election of
Kyriakos Mitsotakis
last weekend as leader of the New Democracy party could spell trouble for Tsipras and for political unity.
The son of a former prime minister and member of a well-known political dynasty, the 47-year-old is widely seen as a serious political alternative to Tsipras.
Following his appointment as leader of the opposition he promised to confront an “ineffective and populist” government.
With the Greek government having seen their majority reduced to three, cross-party political buy-in for reform measures is essential for the successful completion of the first review mission.
A parliamentary vote on pension reform will be the first test, with Mitsotakis already indicating he opposes the government’s plan to fill the pension gap by raising employers’ contributions. For all parties, swift completion of the first bailout review is vital if Greece is to move forward with one of the government’s main priorities: debt relief. The country’s lenders have indicated that debt relief measures will only be considered on completion of the first review.
The continuing involvement of the IMF is also crucial. Despite a cooling in relations between Athens and the Washington-based fund, a number of European countries, particularly Germany, are demanding IMF involvement in the programme.
As negotiators begin a crucial few months in the Greek bailout talks, the euro zone economy will be hoping discussions on the Greek bailout progress without incident.
The EU cannot afford another crisis any time soon.