Economists: Will the Greek bailout deal work?
Even if the deal is ratified by Greek parliament, some economists don't believe it will transform the Greek economy
By Andrew Jay Rosenbaum
ANKARA
Will the Greek bailout deal work? Will it turn the Greek economy around?
Economists aren't all sanguine about its prospects: Some forecast that the changes expected from the economic reforms won't happen.
"Greece is not out of the woods yet," wrote Citigroup analysts in a note published on Monday.
The initial obstacles are, of course, political ones. Greek Prime Minister Alexis Tsipras already faces a revolt from the left wing of his ruling coalition, as Greek Energy Minister Panayotis Lafazanis and Defense Minister Panos Kammenos have vowed to lead a “No” vote on the deal.
But, should the deal pass the Greek parliament, and should it be ratified by eurozone parliaments -- there are dissenting voices in Slovakia, Latvia and Finland already -- the measures could fail on economic issues.
Guru investor Mohammed el-Erian put it in a nutshell, when he told CNBC on Monday: "The result of gunboat diplomacy can only be uncertainty”. Erian said that the Greek bailout was "in relative terms, a good thing, but in absolute terms a total mess".
Jonathan Loynes, chief European economist at Capital Economics, told Anadolu Agency on Monday that the deal was unlikely to prompt a significant improvement in Greece’s economic and fiscal situation.
"Even with additional support for Greek banks, capital controls are likely to remain in place and the additional austerity needed to achieve the primary surpluses demanded by Greece’s partners will weaken the economy further. Accordingly, the institutions [the International Monetary Fund, the European Central Bank, and the EU] could quickly decide that Greece is not meeting the conditions of the bailout," he said.
Citigroup analysts worried that conditions imposed by the bailout agreement could dampen economic growth.
"The fact that Greek banks will continue to be subject to stringent capital controls for some time and the lack of liquidity in the economy is likely to further weigh on the Greek economic outlook and public finances," Citigroup analysts warned.
"This raises the risk that Greek economic and fiscal performance will undershoot its program targets, which could again imperil its membership in the eurozone. Continued bank closures and the absence of a noticeable economic recovery could also increase social tensions."
There was still a possibility of a “Grexit,” Citigroup analysts said, because the Greek economy might not respond to the bailout in the way creditors expect.
Economists at the Center for Economic Reform worried that the emphasis on structural reforms in the deal was misguided.
"It is mainly fiscal measures that matter for near-term growth, and thus for the success of the bailout," wrote Christian Odendahl and John Springford in a note on Monday.
"The agreed structural reforms will make little difference to the bailout’s success or failure, since they require economic growth, inflation and time to have an impact, and all three are in short supply. Structural reforms will only work if there is sufficient demand in Greece: the agreed austerity will reduce that demand, and thus fiscal policy will destroy the bailout’s chances of success," they predicted.
In other words, imposing austerity measures on Greece will reduce growth, at the very time that growth is needed.
Good or bad for eurozone?
Economists also worried that the way in which negotiations were handled by European leaders would weigh on the future of eurozone.
London School of Economics professor Paul de Grauw tweeted: "Template of future governance of eurozone being written in Brussels: submit to German rule or leave."
Yale economist Jeffrey Sachs also complained about too much German influence: ""Europe’s bizarre decision-making structure has allowed domestic German politics to prevail over all other considerations. And that has meant less interest in an honest resolution of the crisis than in avoiding the appearance of being lenient toward Greece," Sachs wrote in a note in Project Syndicate on Saturday.
Jacob Kirkegaard, senior fellow at the Peterson Institute for International Economics, also expressed concerns about just how close Greece came to a “Grexit”.
"This was not really about Greece. It was about the very clear public announcement by the Germans and others that they were negotiating with 'Grexit' on the table," Kirkegaard wrote in a note. "That is breaking a taboo that marks a significant, long-term change in the way the euro works. The signal has now been sent that if you do not behave inside the euro, you may find yourself on the outside."
But the harshest note was sounded by Nobel laureate economist Paul Krugman. In a series of tweets on Monday, he called the bailout deal, "madness," and complained that the creditors "went beyond harsh into pure vindictiveness".
"It is, presumably, meant to be an offer Greece can't accept; but even so, it's a grotesque betrayal of everything the European project was supposed to stand for," he tweeted.
