Blog Post

Should other Eurozone programme countries worry about a reduced Greek primary surplus target?

In this post Zsolt Darvas assesses the possible reaction of other Eurozone programme countries to a reduction in the Greek primary surplus target from the current 4.5% of GDP to a lower value, somewhere in the range of 2-4% of GDP.

By: Date: February 25, 2015 Topic: European Macroeconomics & Governance

Policymakers in other Eurozone countries that received financial assistance are concerned about giving concessions to Greece. They fear that their domestic audiences will question the fiscal and structural adjustments they implemented under the pressure of the Troika, and that thereby the popularity of anti-austerity parties may increase.

In this post I do not assess what should be the primary surplus target for Greece: this will be the result of a bargaining between Greece and its official lenders and the decision will be ultimately political. While I see a case for a somewhat lowered primary surplus (see my earlier posts on this issue here and here), in my view a proper long-term solution to the Greek problem should include a new ESM loan (with appropriate conditionality and safeguards). However a lowered primary budget surplus target would necessitate a larger ESM loan and the willingness of euro-area partners to agree to that.

In this post I assess the possible reaction of other Eurozone programme countries to a reduction in the Greek primary surplus target from the current 4.5% of GDP to a lower value, say to somewhere in the range of 2-4% of GDP.

I show the following points:

·  Even after a reasonable lowering of the Greek primary surplus target,

o   the primary surplus will be still higher in Greece than in other Eurozone programme countries;

o   total fiscal adjustment in 2009-15 will continue to be much larger in Greece than in other Eurozone programme countries;

·  Other Eurozone programme countries also underperformed relative to their programme targets and therefore Greece is not an exception in this regard.

Table 1 shows that from 2009-2014, the change in the headline primary balance (as % of GDP) was about the same in Greece and Ireland and much lower in Portugal, Spain and Cyprus. Yet the headline primary balance is not a good indicator for measuring fiscal effort, because it is impacted by one-off measures, like bank recapitalisation costs and one-off revenues (privatisation and the exceptional Eurosystem profit transfer to Greece may also be recorded among one-offs). It is also affected by the economic cycle (in a recession tax revenues fall and unemployment benefit payments increase). Excluding one-off measures (the middle data panel of the table) and both one-off measures and the impacts of the economic cycle (i.e. the structural balance, the right data panel of the table), Greece has clearly implemented the largest fiscal adjustment among Eurozone programme countries.

For 2014, I use the European Commission’s February 2015 estimate, which may be imprecise, especially since more recent data suggests that fiscal revenues fell towards the end of the 2014.  Yet even if the Commission’s estimate overstates the primary surplus in 2014, my main conclusions remain valid as Greece has undergone so much more fiscal adjustment than other Eurozone programme countries.

Source: Winter 2015 forecast of the European Commission. The structural primary balance is available only from 2010 onwards in this forecast. For 2009, we used the Spring 2014 forecast adjusted by the average difference in 2010-11 between the estimates of the Winter 2015 and Spring 2014 forecasts.

Table 1: Primary budget balance of the general government (% GDP)

In terms of the structural primary balance, in 2009-14 fiscal adjustment in Greece was about twice as large as in Ireland, Portugal and Spain and three times as large as in Cyprus. Nicolas Carnot and Francisco de Castro developed a more suitable measure of fiscal adjustment that they call “discretionary fiscal effort”, which suggests the same picture.

Certainly, Greece had more public debt and a larger structural deficit in 2009 than the other four countries, so it had to adjust more. But if the primary balance target of Greece is reduced somewhat, total fiscal adjustment will still remain much larger in Greece than in other Eurozone programme countries and its new target primary surpluses in 2015 and later years will also likely remain larger than in other programme countries, where the primary balance is expected to be in the range from -1.3% (Spain) to 1.6% (Portugal); see the Annex.

Finally, Table 2 demonstrates that other programme countries also underperformed relative to their programme targets in terms of their primary budget balances, so Greece is not an exception in this regard. Portugal and Spain consistently underperformed relative to the programme requirements in 2011-2015 (Troika programme for Portugal, national stability programme for Spain), while Ireland was on track only in 2012-13 but underperformed in 2011 and 2014-15.

Sources: Programme targets: Table 2 on page 27 of IMF (2011): ‘Portugal: Request for a Three-Year Arrangement Under the Extended Fund Facility’ ( http://www.imf.org/external/pubs/cat/longres.aspx?sk=24908.0), Table 3 on page 36 of IMF (2010) ‘Ireland: Request for an Extended Arrangement’ (http://www.imf.org/external/pubs/cat/longres.aspx?sk=24510.0) and Table 5.1 on page 22 of Spain (2011) ‘Stability Programme, Spain, 2011-2014 (http://ec.europa.eu/europe2020/pdf/nrp/sp_spain_en.pdf). The actual values are from the Winter 2015 forecast of the European Commission.

Table 2: Ireland, Portugal and Spain: primary balance targets and actual outcomes (% GDP)

Therefore, if Greece’s  primary surplus target were lowered somewhat, I would suggest that policymakers in other Eurozone programme countries  justify this to their electorates by explaining that fiscal adjustment and the level of primary surplus would  remain higher in Greece.   They should also admit that they missed their own fiscal targets. Furthermore, Greece is clearly a special case: form peak to trough, Greek GDP collapsed by 26%, while the fall in output was much smaller in the other countries: 9% in Ireland, 7% in Portugal and Spain and 10% in Cyprus.

 

 

 

 

Annex: Annual fiscal data (% of GDP)

The following tables include annual data from the European Commission’s February 2015 forecast. The structural primary balance is available only from 2010 onwards in this forecast. For 2007-09, we use the May 2014 forecast adjusted by the average difference in 2010-11 between the estimates of the February 2015 and the May 2014 forecasts.

Related Blog Articles

Europe needs a lasting solution for the Greek problem

The maths behind an amended Greek plan


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article Download PDF
 

Policy Brief

Rebooting Europe: a framework for a post COVID-19 economic recovery

COVID-19 has triggered a severe recession and policymakers in European Union countries are providing generous, largely indiscriminate, support to companies. As the recession gets deeper, a more comprehensive strategy is needed. This should be based on four principles: viability of supported entities, fairness, achieving societal goals, and giving society a share in future profits. The effort should be structured around equity and recovery funds with borrowing at EU level.

By: Julia Anderson, Simone Tagliapietra and Guntram B. Wolff Topic: Energy & Climate, European Macroeconomics & Governance Date: May 13, 2020
Read about event
 

Past Event

Past Event

CANCELLED: How adequate is the European toolbox to deal with financial stability risks in a low rate environment?

Bruegel is delighted to welcome the governor of the Central Bank of Ireland, Gabriel Makhlouf. He will deliver a keynote address about how adequate the European toolbox is to tackle financial stability risks in a low rate environment. Following his speech, a panel of experts will further discuss the topic.

Speakers: Gabriel Makhlouf, Guntram B. Wolff and Agnès Bénassy-Quéré Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 31, 2020
Read article More on this topic
 

Blog Post

As the Coronavirus spreads, can the EU afford to close its borders?

In 2018, 320 million trips were made between EU countries and almost 2 million people crossed Schengen borders to go to work. Stopping them would cause serious economic disruption.

By: Raffaella Meninno and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: February 27, 2020
Read article More on this topic More by this author
 

Blog Post

The EU’s poverty reduction efforts should not aim at the wrong target

The EU cannot meet its ‘poverty’ targets, because the main indicator used to measure poverty actually measures income inequality. The use of the wrong indicator could lead to a failure to monitor those who are really poor in Europe, and a risk they could be forgotten.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: February 18, 2020
Read article More on this topic
 

Blog Post

A European anti-money laundering supervisor: From vision to legislation

In fighting anti-money laundering, the European Commission should act fast toward creating a central supervisory authority.

By: Joshua Kirschenbaum and Nicolas Véron Topic: European Macroeconomics & Governance Date: January 24, 2020
Read article More on this topic
 

Blog Post

A Major Step Toward Combating Money Laundering in Europe

Combating money laundering in Europe took a momentous step with finance ministers of France, Germany, Italy, Latvia, the Netherlands, and Spain putting forward a joint proposal.

By: Nicolas Véron and Joshua Kirschenbaum Topic: Finance & Financial Regulation Date: November 25, 2019
Read article More by this author
 

Blog Post

Bank regulation in the European Union neighbourhood: limits of the ‘Brussels effect’

The EU model of financial market regulation is increasingly copied by third countries. In this context, the EU’s efforts to promote its model beyond its borders should take into account the underdevelopment of financial markets in many partner countries, and the often insufficient capacity of regulators and supervisors.

By: Alexander Lehmann Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: November 20, 2019
Read about event More on this topic
 

Past Event

Past Event

Better governance, better economies

This event will feature the presentation of the 2019 EBRD Transition report, which focuses on governance in the EBRD regions.

Speakers: Daniel Daianu, Beata Javorcik, Zsuzsanna Lonti and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Press Club Brussels Europe, Rue Froissart 95, 1000 Brussels Date: November 20, 2019
Read article More on this topic
 

Opinion

Politics, not policy will help Lagarde save the eurozone

Her success at helm of Europe’s central bank will depend on her ability to mend fences with hawkish policymakers.

By: Guntram B. Wolff and Rebecca Christie Topic: European Macroeconomics & Governance Date: November 4, 2019
Read article More by this author
 

Podcast

Podcast

How to Spend it

Can governments make their fiscal policy go further? And are they trusted enough to try? This week The Sound of Economics asks if the quality of public spending is as important as the quantity.

By: The Sound of Economics Topic: European Macroeconomics & Governance, Global Economics & Governance Date: October 23, 2019
Read article More on this topic
 

Blog Post

Talking about Europe: La Stampa 1940s-2010s

An on-going research project at Bruegel seeks to quantify and analyse printed media discourses about Europe over the decades since the end of the Second World War. In this third blogpost, we carry out the exercise on 9.9 million articles from an Italian daily newspaper, La Stampa. The trend increase in the frequency of European related articles, previously found looking at the French and German press, is confirmed in the case of Italy.

By: Enrico Bergamini, Emmanuel Mourlon-Druol, Francesco Papadia and Giuseppe Porcaro Topic: European Macroeconomics & Governance Date: October 22, 2019
Read article More on this topic More by this author
 

Podcast

Podcast

Brexit: a European Odyssey

Nicholas Barrett and Guntram Wolff talk to Kalypso Nicolaïdis, author of Exodus, Reckoning, Sacrifice: Three Meanings of Brexit. Together they discuss the mythology that binds Britain to continental Europe

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: October 11, 2019
Load more posts