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EU faces crisis as IMF warns Greek debts are on ‘explosive’ path
The EU faces a looming crisis which could threaten the sustainability of the eurozone as the International Monetary Fund has warned Greece’s debts are on an “explosive” path, despite years of attempted austerity and economic reforms.
Global financiers at the IMF are increasingly unwilling to fund endless bailouts for the eurozone’s most troubled country, passing more of the burden onto the EU – at a time when Germany does not want to keep sending cash to Athens.
The assessment opens up a fresh split with Europe over how to handle Greece’s massive public debts, as the IMF called on Europe to provide “significant debt relief” to Greece – despite Greece’s EU creditors ruling out any further relief before the current rescue programme expires in 2018.
Jeroen Dijsselbloem, the Eurogroup President repeated that position on Tuesday, saying there would be no Greek debt forgiveness and dismissing the IMF assessment of Greece’s growth prospects as overly pessimistic.
"It's surprising because Greece is already doing better than that report describes," said Mr Dijsselbloem, who chairs meetings of eurozone finance ministers, adding that Greece was on track for a “pretty good recovery at the moment”.
The renewed divisions over how to handle the Greek debt crisis has raised fresh questions over whether the IMF will be a full participant in the next phase of the Greek rescue – a key condition for backing from the German and Dutch parliaments.
As Angela Merkel, the German chancellor, fights a tough reelection battle, Germany is particularly reluctant to send funds directly to Greece, with populist parties in Germany arguing that the payments amount to an unfair bailout from hard-working Germans to less deserving Greeks.
The IMF split came as Mrs May last night comfortably defeated a Brexit rebellion in the Commons as MPs rejected Labour plans to give Parliament a "meaningful" vote on the terms of a final deal.
Despite suggestions that up to 30 Tory MPs could defy their party whip and back the Labour amendment just seven chose to do so.
Mrs May stemmed the rebellion after the Government pledged to hold a vote in Parliament on the deal before it is sent to the European Parliament.
However ministers said that MPs would have to "take or leave it", meaning that Mrs May is prepared to walk away from Europe without a deal if Parliament rejects it.
A fresh crisis over Greek debt could be triggered as soon as in July when Greece is due to repay some 7bn euros to its creditors – money the country cannot pay without a fresh injection of bailout cash.
Beyond the long-running concerns over Greek debt, Europe is currently locked in a fierce internal struggle over how to “refound” the European Union in the wake of Brexit and the apparent hostility now emanating from White House.
Mrs Merkel, the German chancellor, acknowledged the calls for change from within the EU yesterday while on a trip to Poland, but said she would argue that the EU should “proceed very cautiously” on the question of treaty change as it faced down a growing number of existential threats
Reluctant EU members, led by Poland, are calling for a return to the union's founding principles, asking for a fundamental overhaul of treaties that would return power back to nation states.
An EU ‘concept paper’ launched last week ahead of the 60th Anniversary celebrations of the Treaty of Rome next month has deepened divisions after it emerged that it did not contain a single mention of the member states, only the EU institutions, according to a senior diplomatic source.
Greek GDP has started to grow, expanding by an estimated 0.4 per cent last year, but it is on a very weak path. IMF economists expect the country to grow at less than 1 per cent per year over the long-term, which is too low for it to pay down its debts.
That means Greece’s “public debt remains highly unsustainable, despite generous official relief already provided by its European partners,” the IMF believes.
Even if the country successfully implements all of its planned financial and economic reforms – which has been a struggle so far – its debt is projected to fall to from 179pc of GDP a year ago to 160pc of GDP by 2030 “but become explosive thereafter”.
“Greece cannot be expected to grow out of its debt problem, even with full implementation of reforms,” the IMF warned on Tuesday.
Despite Eurogroup protestations that the Greek bailout was sustainable, the IMF estimates that by 2060 its debts will amount to a crushing 275 per cent of GDP.
The IMF said progress to date in turning the crisis around has been “significant” but also acknowledged that the deep cuts to public services and pensions had come “at a high cost to society, reflected in declining incomes and exceptionally high unemployment.” Unemployment is currently still stuck at above 23 per cent.
The IMF is very clear about who it believes should give Greece more money to try to turn this situation around. “Greece cannot restore debt sustainability through its efforts alone and needs significant debt relief from its European partners,” the IMF said.
Greek finance minister Euclid Tsakalotos said the IMF’s report “fails to do justice” to the strength of the economic recovery and the improvement in the government’s books.
The IMF also gives a “misleading representation” of the government’s reform efforts, he said.