The adoption of a sound fiscal policy with a return to primary surpluses from 2023 and the continuation of reforms are considered the most important factors for the future of the Greek economy by ESM Managing Director Klaus Religa.

In fact, as he points out in an interview with K, these factors will play a more decisive role than others that worry us, such as rising interest rates. And they will be critical to reaching investment grade, which Mr Regling leaves open whether it will be reached in 2023.

Mr. Rehling’s term of office ends on 7 October. After 12 years of experience working on the Greek Crisis, last week in Athens he was awarded the Lord Byron International Philhellenic Prize. The main goal of keeping Greece in the eurozone has been achieved, he said, recalling how close we came to Grexit in 2015, when few believed that Greece would carry out a third program, as he claimed. However, he also agrees that the debt restructuring could have been carried out earlier.

As part of his visit here, for the last time, in his current capacity, he met with Prime Minister K. Mitsotakis and received assurances, according to him, that next year the country will return to a primary surplus state. There are other areas in which, according to the head of the ESM, further progress is needed: justice, banks, state-owned enterprises, bankruptcy procedures. For Europe as a whole, Mr Regling warns that the next few quarters will be difficult as many expect a recession. However, he notes that the energy crisis is different from the pandemic, it needs to be addressed at the level of member states and the creation of funds, such as the Recovery Fund, cannot continue.

– The trip was long. Longer than it should be. And painful for the population. During the adaptation period, I had to face serious problems. Competitiveness was lost, fiscal and trade deficits were too large and needed to be adjusted. But Greece succeeded. After the bailout ended, Greece’s economic performance was better than the eurozone average, as were other countries that borrowed from the EFSF and ESM. Through hardships, we moved forward without forgetting what was important: creating a sustainable and prosperous future for the Greek people.

Of course, even after increased oversight, it is important to continue reforms. And this is true for every country. For Greece, it is clear that the adoption of a prudent fiscal policy will be important for the future. The Prime Minister, with whom I last met in my current capacity, has confirmed that the primary balance will return to surplus next year. This is important given the high public debt, as well as the importance for the future of the goal of bringing Greece back to investment grade next year.

– This is an important point. Of course, there are other things that need to be done that are on the government’s agenda. Greek banks have done a lot, but they must continue to cut their NPLs. They need to be made stronger in order to support economic growth through the provision of credit.

State-owned enterprises must continue to reform to become more productive. Hellenic Holdings and Property Company plays an important role in this context. Bankruptcy procedures must be well implemented. Justice reform is also important. If foreign investors are convinced that the justice system works well, Greece will become more attractive for them as a place to invest.

Greece succeeded. After the bailout ended, Greece’s economic performance was better than the eurozone average.

“I can’t speak for the rating agencies, but we know from their reports and contacts that the fiscal position is important to them as they have to weigh whether the debt is sustainable. They examine the fiscal stance and the implementation of reforms because these factors enhance growth momentum in the long run. And this is a decisive factor in assessing debt sustainability. Perhaps next year Greece will reach investment grade. However, this also depends on the evolution of domestic and international factors.

– This is also an important factor. But, again, I can’t say exactly when they will be active, and not all of them will be active at the same time.

– Not in the next few years, because Greece has the highest debt ratio in Europe, but more than half of its debt is owned by public creditors, especially EFSF and ESM. Therefore, most Greek debt has long maturities and very low interest rates. Therefore, the interest burden on this debt is relatively small. In addition, in 2018 we took steps to protect Greece from future interest rate hikes. A certain portion of the debt has fixed interest rates, so it is not affected by increases in market interest rates.

Therefore, the most important thing for Greece is to continue prudent and prudent fiscal policy and carry out the necessary reforms to ensure sustainable economic growth and an efficient economic environment. These are decisive factors, more so than the tightening of monetary conditions.

– The main goal of keeping Greece in the eurozone has been achieved. And it was a very good result. In 2015, we were very close to Grexit. When I then publicly stated that the third Greek program could work, few people believed me. But it worked. Leaving the eurozone would be a real financial disaster for the Greek economy and for the Greek people. It would also be a political disaster for Europe, not just for Greece. This would change the nature of the monetary union. This would make us weaker internationally, both economically and politically. Together we are stronger.

We were not prepared for the euro crisis. When you learn by doing, there are things that, looking back, you see that they could have been done differently. Today, many observers agree that the 2012 debt restructuring should have happened earlier. But back then we didn’t have mechanisms. This happened for the first time in a currency union. We lived in unprecedented times.

Today we are much better prepared. And at ESM we take lessons learned very seriously. We are constantly working to improve our knowledge and our readiness.

The next few quarters will be difficult, many expect a recession

– The most important thing to remember is that we need a mechanism for coordinating fiscal policy in a monetary union. We have a centralized monetary policy, but a decentralized fiscal policy that needs to be coordinated. It should be done in an efficient way, it shouldn’t be too difficult. This is one of the problems of the current pact. It has become so complex that many do not understand how certain decisions are made, and this does not contribute to credibility in national parliaments and financial markets. The pact needs to be simpler, clearer and stay true to its core purpose: maintaining debt sustainability in all member states.

– Are you not worried that a recession will soon begin in Europe?

– The situation is not easy. Most economists predict negative growth over the next two to three quarters. Some observers, mostly in the markets, are warning that we could be in a recession in 2023. This is not the prevailing opinion, but we must be prepared for the next few quarters to be difficult. Energy prices are high and there is a shortage of energy supply, which can lead to a reduction in production. The purchasing power of households is reduced, suppressing consumption, and consumption is the largest part of the economy.

At the same time, however, it is important to recognize that not everything is black. In the first half we had higher than expected growth in Europe and this is also very true for Greece. In fact, Southern Europe is faring much better this year than Northern Europe, thanks in large part to a successful tourist season. We also see a very strong labor market in most European countries, with unemployment in the Eurozone at its lowest level since the establishment of monetary union. Another positive factor is that the measures taken in response to the pandemic, in particular the Recovery and Resilience Fund, are also helping during this period of the energy crisis.

– In general, are you satisfied with the reaction of Europe to the war and the energy crisis? There has been criticism that the response has not been as effective as it was during the pandemic, that Europe is falling behind and not doing enough for its citizens, and that it has lost the most in this war. What do you think;

“It is not true that states have not done enough. They did a lot. This is a different situation than a pandemic. We have experienced a loss of revenue due to the deterioration in the terms of trade that cannot be compensated. Fiscal policy should support vulnerable households and businesses, but cannot fully offset income losses for everyone. Measures must be targeted. The energy crisis needs to be addressed mainly at the state level. The creation of funds at the European level cannot continue.

– But a single policy can be adopted.

– It’s different. The adoption of coordinated energy conservation policies is indeed critical, as it can cushion the shock to the economy and promote efficient resource allocation. Tuning could have been done a little earlier, but it is being done now. The Commission will present its proposals, and now all states are moving more or less in the same direction.