Two of the European Union’s biggest risks – Greece’s bailout and the UK vote over EU membership – may collide this summer, writes Hugo Dixon.
Britain isn’t in the euro zone and doesn’t have to contribute to Greek bailouts. So logically, there should be no connection. But British eurosceptics would exploit the sense that Greece was back on the brink of bankruptcy to argue that the UK should put clear water between itself and the EU. They are already successfully exploiting Europe’s refugee crisis for the same purpose, even though the UK is not part of the border-free Schengen Area. [...]
However, the main reason why the bailout review hasn’t been completed is that the IMF and the European Commission are at loggerheads over what is needed. The IMF is both more hawkish and more dovish.
The fund thinks that if no new measures are taken, Greece will have a 1 percent primary deficit in 2018 – that is, before interest payments are taken into account. The commission expects a surplus of around 0.5 percent. As a result, the IMF believes Athens needs fiscal measures equal to 4.5 percentage points of GDP to hit the 3.5 percent 2018 target, while the commission argues 3 percentage points would do the trick.
On the other hand, the fund also thinks it would be impossible and counterproductive to inflict another 4.5 percentage points of austerity on Greece. It is arguing that 2.5 points is the most the country can take.
The snag is that, on the IMF’s figures, this would mean Greece would only achieve a 1.5 percent primary surplus in 2018. That, in turn, would mean that its euro zone creditors would have to be more generous in relieving the country’s debt load so that it is sustainable in the long run.
One way of resolving the impasse would be to kick the IMF out of the Greek programme, as the government wants. It may seem odd that Tsipras wants to get rid of an institution that is arguing for more debt relief. But he is less concerned with the details of a debt deal that won’t kick in until the next decade than with getting a deal done fast. The premier presumably thinks this would revive his fast-fading popularity. [...]
Maybe Merkel can decide which way to jump in the next few weeks. If so, the Grexit risk can be defused before the Brexit referendum. Maybe, too, some fudge can be found that stops Greece going bust in July but postpones the real decisions until after the UK votes. If not, the two risks could clash horribly.
Full article on Reuters
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