“Greece is back to growth,” European Commission Vice President Valdis Dombrovskis stated to the Athens-Macedonian News Agency (ANA), in an interview given just days after the heads of the institutions’ missions completed a round of contacts in Athens. He noted that Greece, during the three consecutive programmes, has implemented a major reform agenda, carrying out reforms that strengthen the competitiveness and the fundaments of the Greek economy, which is now growing.
The European Commissioner in charge of the euro but also Financial Stability, Financial Services and Capital Markets Union, Dombrovskis said that things seem to be going well on the fiscal side, with Greece having met its target for 2018 and expected to do the same for this year.
He also said that “the tendency is clear that Greece is returning to the markets” but warned that its return after being excluded from the markets for nine years “is a very delicate task” that does not leave much room for either “manoeuvres” or “mistakes”.
Five months ago Greece exited ESM programme. What is your first assessment on the pace of reform implementation during this first post-memorandum period?
Dombrovskis: As you know there was the enhanced surveillance mission in Athens this week doing the assessment and its report will come out later in February. Broadly speaking things seem to be broadly on track on the fiscal side. Greece has met its target in 2018 and the budget is prepared in a way which will allow to meet also the primary surplus target foreseen of GDP this year. This time the enhanced surveillance mission concentrated on structural reform implementation, including reform of the banking sector, concerning measures to reduce NPLs and also household insolvency and other areas of reforms. Of course, there are still quite a few important reforms which are still in the process of implementation, as for example strengthening the independent tax authority, the work of the land register or cadastre and the work on privatisation. All these areas now have been followed up and will be reflected in our progress report.
According to the first enhanced surveillance report there were 16 specific reform commitments to be achieved, but none of them was completed. Today how are things progressing?
Dombrovskis: There seems to be progress across all policy areas. As for the pace of work, some reforms are more advanced some still need more preparation. For example, in the area of NPLs we expect some proposals in the coming weeks from the government.
How close are between them, the Greek government and the institutions, in order to agree a plan for reducing NPLs?
Dombrovskis: This work is ongoing. One can expect some proposals from the government in the coming weeks. Actually during this week I had a discussion both with Finance Minister [Euclid] Tsakalotos and the Governor of the Greek Central Bank, [Yannis] Stournaras, to discuss those initiatives which are prepared both by the Greek government and the Central Bank.
Why is the reduction of NPLs important for the stabilisation of the Greek banking sector?
Dombrovskis: Greece has by far the highest rate of NPLs in the EU. Over 40 pct of loans are not performing, against 3.4 pct which is the EU average. So it is a major difference. For example, Italy, which often hits headlines in terms of NPLs, has a ratio around 10 pct. The point is that this level of NPLs is the vulnerability of the Greek banking system, so a potential source of instability and it also hinders proper functioning of the Greek banking system and therefore hinders loans to the real economy, to businesses and households, and so it is an issue which needs to be addressed. With this high level of NPLs, of course there need to be some systemic structural solutions, both on workout of the current stock of NPLs but also addressing the root causes, like why Greece has such a high stock of NPLs. That’s why, when I was discussing Greece’s reform agenda, I was mentioning this work on household insolvency law, so as to find the right balance between protecting the vulnerable borrowers but at the same time avoiding moral hazard and avoiding incentives for strategic defaulting.
The social program included in the Greek budget for 2019 foresees some positive measures, such as raising the minimum wage. What is the European Commission’s opinion on this?
Dombrovskis: It is primarily up to the member-states to take those decisions. What we are basically assessing here is potential impact on job creation, so also, in this case, like in the case of other member-states, we emphasised that wages need to develop in line with productivity developments.
The second enhanced surveillance report will be released at the end of February. The outcome of this report will determine the decision on whether the profits from the Greek bonds held by the ECB and Eurozone central banks (ANFAs and SMPs) will be returned to Greece. Do you believe that the reform path so far makes the return of the profits a possible scenario?
Dombrovskis: I would say it is possible. As I said, broadly things are on track. It is important to continue progress in the reform agenda and then we can expect also positive outcomes as regards SMPs and ANFA profits.
The question is when Greece will be able to return with success to the markets. During the last five months this has not been possible because sovereign spreads were quite elevated. However, Italy and Spain have both recently issued bonds with success. Do you believe this is the right moment for Greece to seize?
Dombrovskis: It is for the Ministry of Finance and for the Treasury to decide this moment. In any case, it’s clear that Greece is now testing the markets and building up the so called “yield curve”, so testing also yields in different maturities. But the decision on exact dates of issuance and exact amounts is something for the Greek authorities to decide. The tendency is clear that Greece is returning to the markets. We also provided a substantial cash buffer to ensure Greece can do it in a gradual way and the country does not have large financing needs to be covered by the market in the immediate post-programme period.
Till recently there was volatility in the markets, also because of the situation in Italy. Do you believe that now the environment is more positive?
Dombrovskis: If we talk about general market environment, one can say that yes, if we think about Italy, one can say that things are better now than in autumn last year because there was not clarity about Italy’s fiscal trajectory. Eventually, Italy corrected its fiscal trajectory quite substantially, bringing down the budget deficit to 2 pct of GDP and correspondingly avoided being put in Excessive Deficit Procedure related to debt. This has helped to calm the market situation in Italy and spreads came down.
Is Brexit a negative factor for the markets?
Dombrovskis: There are also negative factors, of course. One can mention uncertainty around Brexit. The Brexit date is only two months from now and there is still no clarity on what scenario is going to materialise. Is it a deal or no deal? Or postponement?
Also, generally if you look at global economic developments, we see some slowdown of economic development and also some tension like trade conflicts. Therefore this global environment is, I would say, somewhat complicated but at the same time if you look the situation in the EU and eurozone, economic growth is continuing, we are now entering the 7th year of economic growth.
Is there a risk for the Eurozone and EU economy from Brexit? How well prepared is the EU for a “hard Brexit”?
Dombrovskis: One thing is clear. There is going to be a negative effect on economy. If you disrupt decades of economic integration – and that is what is happening with Brexit – that is what is going to be the case. Clearly the no-deal Brexit is more destructive than a Brexit with a deal. At the same time, we don’t see a major impact on the EU or Eurozone economy. We are expecting economic growth to continue at around 2 pct (according to autumn forecast). But we see a more pronounced effect in the UK itself. Already, the UK is now the slowest growing EU economy, together with Italy. Primarily it’s because of those negative effects of Brexit, (even though we have not even reached Brexit yet) that have started already to materialise.
Regarding deepening EMU, why is the European Deposit Insurance Scheme (EDIS) advancing so slowly?
Dombrovskis: If we look at broadening the EMU agenda, we see that in some areas things are broadly on track, for example the work on the backstop for the single resolution fund, the reform of the European Stability Mechanism, including the introduction of precautionary instruments, work on the capital markets union, all those work tranches are moving forward. As regards EDIS, progress has been very slow. We put forward a proposal as European Commission in 2015. Now we are in 2019 and we are discussing a roadmap toward political negotiations. So it means that indeed there is very slow progress. It is positive that those discussions are continuing and there is a broad acceptance that EDIS is the missing pillar of the banking union. From the Commission side, we could have wished faster progress on this.
To conclude the interview, allow me to go back to the Greek issue. There are voices in Greece saying that the country sooner or later will end up asking for the help of the ESM again. Do you think there is this risk?
Dombrovskis: Currently Greece is back to growth and has implemented during the three consecutive programmes a major reform agenda. It is difficult to find some area where reforms were not implemented. This has helped to strengthen the competitiveness and the fundaments of the Greek economy, which is now growing. So clearly risks have receded. At the same time, Greece’s return to the markets is a very delicate task. It has been out of the markets basically for 9 years, it has by far the largest debt to GDP ratio, more than 180 pct, so there is not much room for manoeuvre and there is not much room for mistakes. That’s why I emphasise the need for Greece to stay on the agreed course as regards both fiscal targets and the structural reform agenda. This is the factor that provides confidence in the Greek economy and will allow the country to successfully return to the markets. Which then allows to clearly say that Greece stands on its own feet.