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http://adrianmariusdobre.blogactiv.eu/2013/06/06/what-is-the-price-of-a-troika-deal/What is the price of a Troika Deal?
Posted by Adrian Marius Dobre on 06/06/13
Tags: Cyprus, Greece, MoU, Troika
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At first sight, requesting and obtaining a bail-out loan from European Central Bank, European Union and International Monetary Fund seems to be the proper solution for overcoming a crisis, especially for any state pressed by time and tomorrow’s uncertainties.
But if we take a better look, a bail-out agreement is conditioned by the implementation of some measures gathered under the umbrella of structural reforms. At national level, they have become the well-known austerity measures. They are very familiar to the citizens of the states that requested loans from foreign lenders, such as Cyprus, Greece, Ireland, Portugal, Romania and Spain.
The economic adjustment programs have some major objectives very clearly included in the Memoranda of Understanding (MoU) regarding the specific conditions for the economic policy. They mainly refer to: restoring banking system security, continuing the fiscal consolidation process and the structural reforms in order to support the competitiveness and sustainable and balanced growth.
More precisely, e.g., the 10 billion euro bail-out Cyprus will receive in the following 3 years from the Troika means:
- Downsizing the public sector
- Ensuring public spending transparency;
- Local government reform;
- Freezing salaries for a limited period of time;
- Increasing the retirement age;
- Restructuring public hospitals and implementing a system of family doctors and setting some financial disincentives to filter the access to higher levels of care;
- Liquidation, cessioning or restructuring state enterprises.
These are few of the most famous examples, but the scenario is repetitive, even a cliche, we could say.
From Memorandum to economic (in) success
The public opinion perceives the memoranda and austerity measures as generalities. But the most important and the most concerning thing is the impact of the authorities’ decisions on everyday life.
Slovenia is struggling to avoid a bail-out from the international lenders, by saving 540 million Euros. The Ljubljana government tries to convice the foreign investors of the credibility of its strategy, it also has raised the export tax from 20 to 22% and has announced the privatization of some companies: Banka Kreditní Nova Maribor (the second largest bank), the mobile operator Telekom Slovenija, the ski equipment manufacturer Elan, the airline company Adria Airways and the Ljubljana airport.
If we go back in time, we could easily notice how Cyprus and Greece have made the same efforts to avoid a Troika bail-out, option that shortly became unavoidable for them.
Do we still have a social Europe?
The austerity measures have led to constitutional or human rights violations in some states because they have undermined people’s access to jobs, public health services, running water and energy. Thus, the European lending institutions exposed themselves to the possibility of being prosecuted in the European Court of Human Rights. There are already numerous cases nationwide in which citizens are suing their state for the implementation of measures imposed by international lenders.
More than 10% of Greece’s population now lives in extreme poverty and the unemployment among young people has reached the unprecedented/ground-breaking rate of 59.3%. Despite strict austerity measures, the Greek economy has fallen by 25% and continues to decline, and its external debt has decreased ONLY by 1 billion Euros after three years of severe austerity.
This year, the Greek government has intervened several times in order to prohibit anti-austerity strikes: it put an end to the one-week sailors’ protests and the subway workers’ strikes have also been banned; moreover, the authorities have issued an order compelling teachers to go to their classes so that they couldn’t protest against the 2-hour increase in their weekly working hours and against the 10,000 layoffs of part-time teachers.
In March, Cyprus’ banks have been closed for nearly two weeks due to massive money withdrawal and in order to prevent the entire banking system collapse. As a consequence, people could withdraw only a limited amount daily and all the shops required cash payment for the purchased goods. Subsequently, one of the largest banks, Laiki, was closed, and banking operations have been drastically reduced at the national level. The European Stability Mechanism banned, as a rule for granting the loan, recapitalizing Laiki and Bank of Cyprus funds through the economic adjustment program.
Unconstitutional cases can be also found in Portugal, Romania and Slovenia. In April, the Portuguese Constitutional Court overruled the elimination of one of the 14 public salaries the employees receive in one year, a 6.4% reduction in pensions of former state employees, the reduction of social benefits for unemployed and sick persons. Romanian government’s plan to cut pensions by 15% was also declared unconstitutional in 2010, and the Slovenian Constitutional Court gave the same verdict last year, in 2012.
To sum up, the austerity program has been implemented within a social protection system that lacks the necessary tools in order to assimilate the unemployment, wage cuts and tax increases. The future unfortunately remains very dark for Greece, which is in its sixth year of recession. The European Commission estimates that the budget deficit will be around 1.8% of GDP in 2015 and 2.2% in 2016.
Disagreements in the Troika family
The most important challenge brought by austerity measures to European states doesn’t refer to the avalanche of cuts, downsizing and layoffs, but to the reality that they will have to weigh very carefully the options they have for economic recovery. The same states are confronted with severe economic, social and political problems.
There have already been designed scenarios under which the IMF should be excluded from the Troika formula so that Europe can solve its own problems with the existing and the future institutions and mechanisms.
“Europe should eventually stop calling in the International Monetary Fund to help with financial crises and handle them using its own institutions”, said Jorg Asmussen, a member of the Executive Board of ECB.
We will see if the European states succeed to manage their own problems with all the instruments available within the European space and if the IMF will lose ground against them.
The Troika model effectiveness is being questioned in two different situations. First of all, we have cases like Slovenia: What are the solutions for the economic recovery? Where should these countries go for help? How firm and effective will they negotiate the provisions of the agreements with the international lenders?
Secondly, we have many examples which show the austerity measures imposed by the Troika Memoranda have not reached the expected results. Unemployment in Greece is alarming, the economy declined and continues doing so, the situation in Cyprus is dramatic. If they exist, what are the other solutions and options? Is there any possibility to return to the negotiation table with the Troika in order to change the memoranda in order to identify the measures that will lead to a real economic recovery? What would be the economic growth measures that should be included in such documents?
The present economic crisis shows that we must leave the accounting pattern that has been used until now. We have to find a new functional one, focused on measures that will truly bring economic development in all its defined complexity.
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