ISSN 2443-8014 (online) The ESM Stability Support Programme Greece, First & Second Reviews July 2017 Background Report INSTITUTIONAL PAPER 064 | NOVEMBER 2017 EUROPEAN ECONOMY Economic and Financial Affairs European Economy Institutional Papers are important reports analysing the economic situation and economic developments prepared by the European Commission's Directorate-General for Economic and Financial Affairs, which serve to underpin economic policy-making by the European Commission, the Council of the European Union and the European Parliament. Views expressed in unofficial documents do not necessarily represent the views of the European Commission. LEGAL NOTICE Neither the European Commission nor any person acting on its behalf may be held responsible for the use which may be made of the information contained in this publication, or for any errors which, despite careful preparation and checking, may appear. This paper exists in English only and can be downloaded from https://ec.europa.eu/info/publications/economic-and-financial-affairs-publications_en. Europe Direct is a service to help you find answers to your questions about the European Union. Freephone number (*): 00 800 6 7 8 9 10 11 (*) The information given is free, as are most calls (though some operators, phone boxes or hotels may charge you). More information on the European Union is available on http://europa.eu. Luxembourg: Publications Office of the European Union, 2017 KC-BC-17-064-EN-N (online) KC-BC-17-064-EN-C (print) ISBN 978-92-79-64712-3 (online) ISBN 978-92-79-64711-6 (print) doi:10.2765/466433 (online) doi:10.2765/915272 (print) © European Union, 2017 Reproduction is authorised provided the source is acknowledged. For any use or reproduction of photos or other material that is not under the EU copyright, permission must be sought directly from the copyright holders. European Commission Directorate-General for Economic and Financial Affairs The ESM Stability Support Programme Greece, First & Second Reviews – July 2017 Background Report EUROPEAN ECONOMY Institutional Paper 064 ACKNOWLEDGEMENTS This report contains the background analysis describing the design of the ESM programme for Greece signed in August 2015 and the implementation of the programme up to July 2017, i.e. up to the conclusion of the second review. It was prepared in the Directorate General Economic and Financial Affairs, under the direction of Declan Costello, Director and Mission Chief, and the coordination of Paul Kutos, Head of Unit and Deputy Mission Chief, and Júlia Lendvai, Deputy Head of Unit. Contributors: Chris Allen, Chrissopighi Peghe Braila, Lászlo Butt, Giuseppe Carone, Declan Costello, Fotini Dionyssopoulou, Francesco di Comite, Matteo Duiella, Olivia Galgau, Hana Genorio, Nikolay Gertchev, Elena Giachin Ricca, Luigi Giamboni, Gabriele Giudice, Christos Gofas, Malgorzata Goralczyk, András Hudecz, Milan Lisicky, Nicolas Jegou, Loukas Kaskarelis, Thrasyvoulos Kipourgos, Zenon Kontolemis, Juho Kostiainen, Paul Kutos, Veli Laine, Júlia Lendvai, Vasileios Maroulis, Benedetta Martinelli, Vasiliki Michou, Stelios Panagiotou, Zoltán Petrov, Fidel Picos, Guillaume Prevost, Alexandra Saller, Andreas Trokkos, Carlo Viviani. Assistance was also provided by Despina Efthimiadou, Fotini Louka and Siofra Mc Donnell. The report was prepared in consultation with ECB and ESM staff. Comments on the report would be gratefully received and should be sent, by mail or e-mail to: Paul Kutos European Commission Unit ECFIN-F-2 CHAR 10/236 B-1049 Brussels e-mail: [email protected] The cut-off date for the Background Report was 31 July 2017. 3 SUMMARY AND MAIN FINDINGS 1. INTRODUCTION 1. In the face of massive external and internal imbalances, which resulted in the loss of market access, in April 2010 Greece requested financial assistance from its European and international partners. In May 2010, the Greek authorities signed a financial assistance programme with the European partners with a financial envelope of EUR 80 billion, as well as a standby arrangement of up to EUR 30 billion from the International Monetary Fund (IMF). Financing from European partners was provided through the Greek Loan Facility (GLF). Despite some progress in tackling imbalances and implementing reforms, as well as disbursements of EUR 73 billion from the GLF and IMF, Greece signed a second financial assistance programme in March 2012. A financing envelope of EUR 144.7 billion was provided by European partners through the European Financial Stability Facility (EFSF), as well as EUR 19.8 billion by the IMF. This financial assistance was also accompanied by measures to restructure private sector debt, leading to a reduction in Greece's debt stock by some EUR 107 billion. Considerable progress in correcting imbalances and implementing reforms was made up to the closure of the 4th review of the EFSF programme in mid-2014. However, despite two extensions, the EFSF programme expired without being completed in June 2015.(1) 2. Amidst political, economic and financial turmoil and the imposition of capital controls in July 2015, the Hellenic Republic concluded an agreement for stability support in the form of a loan from the European Stability Mechanism (ESM) in August 2015. The Memorandum of Understanding (MoU) signed by the Hellenic Republic and the European Commission on behalf of the ESM, details the conditionality attached to the financial assistance facility. The full envelope of the loan amounts to EUR 86 billion, to be disbursed in several tranches after verification by the institutions that programme conditionality is being fulfilled, and has an availability period of three years. 3. The aim of the ESM programme is to allow Greece to complete the necessary economic adjustment process started under the first and second financial assistance programmes, thereby creating the conditions for the sovereign to regain long-lasting access to market- based financing at sustainable interest rates. Notably, this needs to be supported by putting public finances back on a sound footing and laying the basis of sustainable growth through a comprehensive set of deep structural and institutional reforms. Against this background, the policies in the MoU are built around four pillars: restoring fiscal sustainability; safeguarding financial stability; enhancing growth, competitiveness and investment; and fostering a modern State and public administration. 4. The current ESM programme for Greece was provided under the framework established with the entry into force of the ESM Treaty and EU Regulation 472/2013, which involves very different institutional and financing arrangements compared to earlier programmes. This has improved the transparency of work and democratic accountability through a reinforced dialogue with the European Parliament and the national parliaments. The consistency of the programme with the Union goals and policies was also reinforced through explicit references to the Charter of Fundamental Rights as well as other social rights. Consequently, the ESM stability support programme has put a greater emphasis on social cohesion, growth and employment, including active labour market policies. Moreover, the Commission, for the first time, conducted a social impact assessment in August 2015, which concluded that, if implemented fully and (1) Relevant documentation on the stability support programmes for Greece is available at https://ec.europa.eu/info/business- economy-euro/economic-and-fiscal-policy-coordination/eu-financial-assistance/which-eu-countries-have-received- assistance/financial-assistance-greece_en. 1 European Commission The ESM Stability Support Programme for Greece – First and Second reviews - July 2017 Background Report timely, the measures foreseen in the programme will help Greece return to stability and growth in a financially and socially sustainable way, and will contribute to meeting the most pressing social needs and challenges in Greece. The new legal framework also created a basis for the Commission to provide technical assistance to Greece through its newly established Structural Reform Support Service (SRSS), to improve its administrative capacity and address challenges implementing the programme. 5. This background report takes stock of the degree of progress two years into the programme and provides a detailed overview of the measures undertaken to date in each pillar of the ESM programme. Before signature of the ESM programme, the Greek government was asked to implement a set of ambitious prior actions in July 2015. Since the programme was launched in August 2015, two reviews have been completed and three additional sets of intermediate follow- up actions (so-called 'milestones') have been verified – two sets leading up to the first review (in November and December 2015), and one set of milestones between the first and second reviews (in October 2016). The first review of the ESM programme was conducted between March and May 2016, and concluded in June 2016. The second review was conducted between October 2016 and May 2017, and concluded in July 2017. The analysis contained in this report reflects the state of play up to and including that date. The IMF Board gave its agreement in principle to a precautionary standby arrangement at the same time, based on shared conditionality. 6. Progress in the implementation of the ESM stability support programme has resulted in the Eurogroup providing significant additional assurances on debt measures, some of which have already entered