The Financial Impact of BREXIT on Greece

Posted by economia 24/06/2019 1 Comment(s) Greek Business File,

BREXIT will have overall negative effects on Greece. The main reason is not the decline in Greek exports of goods and services to the UK but the fact that Greece will have to increase its participation in the EU budget revenue, while significant decreases will be observed in its receipts from the EU budget. In this detailed article ALEKOS KRITIKOS shares the opinion that Brexit would serve as an opportunity for our country to reposition itself within Europe, forming an alliance of member states that will push for a post-Brexit increase in the multiannual financial framework

 

Greek Business File: June, July, August issue - by Alekos Kritikos

 

In its rolling survey of the impact of Brexit on the EU countries, Standard & Poor’s applies a Brexit Sensitivity Index (BSI). This index measures goods and services exports to the UK, bidirectional migrant flows, financial sector claims on UK counterparties on an ultimate risk basis and foreign direct investment in the UK. The BSI is the sum of these four data points all normalized and converted into a scale from 0 to 1. The higher the sum, the greater the exposure. According to the latest BSI, the five European countries expected to suffer the heaviest consequences are Ireland, Luxembourg, the Netherlands, Cyprus and Switzerland. France and Germany occupy tenth and twelfth position on the list, while Greece is to not to be be found in the top twenty.

 

Brexit painful for Greece

 


This, however, does not mean that the negative eff ects of Brexit will not be felt by Greece: the Greek economy, currently in a period of “convalescence”, remains sensitive to external economic changes while at the same time the country’s support relies to a great extent on the transfers of European funds. Thus the EU budget cuts as a result of Brexit will be more painful. According to government estimates, the total cost of Brexit for the Greek economy is expected to range between 0.3% and 1% of GDP for a decade. This cost is a consequence of the decline in Greek exports of goods and services to the UK and the fall in British investments caused by the assumed devaluation of the British pound, but also from the increase in Greece’s participation in the EU budget revenue. In particular, Greek exports of certain categories of goods (e.g. food, pharmaceuticals) are expected to be impacted negatively, while the impact on tourism is expected to be less marked. At the same time, the possible disruption in the international fi nancial markets may drive up lending risk and interest rates, with consequent adverse effects on Greek bonds. Such negative estimations are contradicted by certain optimistic forecasts, such as a strengthened role for Piraeus as an international shipping centre or the prospects of investment opportunities for Greece in the defence industry, in the context of the restructuring of the European defence industry as a result of Brexit. Yet this optimism about Greece does not seem justifi ed
given the fierce competition, currently in full swing, between Paris, Amsterdam, Frankfurt, Berlin and Luxembourg for London’s “inheritance”.

 

The “gap” from Brexit

 


As regards compensating for the “gap” to be left by Brexit in the EU budget, the Bruegel Institute estimates that, for 2019-2020 alone, the gap to be compensated for will be around 16.5 billion euros. It is also estimated that, after deducting the amount the EU will collect from taxes to be imposed on British products post-Brexit, this amount will drop to 15.7 billion euros. As for the main “net contributors” to the EU budget, the additional burden on Germany will reach 4.2 billion euros, while France and Italy will be burdened with 2.9 billion euros and 2.1 billion euros respectively. For Greece, the corresponding burden is estimated at 224 million euros. However, the burden on Greece is not limited to the increase of participation in the EU budget revenue. Signifi cant
decreases will also be observed in its receipts from the EU budget compared to those it would collect if Brexit were not to happen.

 


Negative impacts

 


The main negative impact for Greece comes from the reduction in appropriations for the Cohesion Policy and the Common Agricultural Policy. According to the Commission, this reduction is 7% and 5% respectively; according to estimates of beneficiary Member States, however, it may reach as much as 10% and 15% respectively (depending on the individual budget headings included in the relevant calculations). Such reductions are caused by the Commission’s intention to fi nance new priorities such as the digital economy, migration, border management and defence, within the limits of an EU budget for 2021-2027 the size of which is about the same as that for 2014-2020. It is logical to assume that, in the absence of Brexit, there would have been much greater – and more effective – pressure to ensure that new priorities would be funded by new resources only and not through cutting back on existing major policies. In other words, and given the dramatic changes which have taken place in the meantime not only in the geopolitical environment of the EU but also in the political and social conditions inside the Union, in the absence of Brexit an increase in the EU budget, both in absolute fi gures and as a percentage of the EU-28’s Gross National Income (GNI) (currently 1.1%), would have been quite likely. 

 

Let’s see what this means for the Cohesion  Policy, which for Greece is of major significance, and for the policy’s basic tools– the European Structural and Investment Funds – which provide funding for the Partnership Agreements, better known in Greece under the acronym “ESPA”. According to the Commissions’ proposals for the period 2021-2027, the allocation of Cohesion resources for Greece amounts to 21.7 billion euros (at current prices), representing an increase of 8% compared to the resources for the 2014-2020 period. Shouldn’t Greece then be happy with this increase when the overall European Cohesion resources are reduced? The answer is no. Here are the reasons why: Among other consequences, the reduction due to Brexit in total Cohesion resources has led to the imposition of two “caps”: (i) the increase in the Cohesion funding for each Member State cannot be higher than 8% compared to the resources for the 2014-2020 period, and (ii) the total Cohesion resources, for the category of countries in which Greece belongs, cannot annually exceed 1.55% of their GDP.

 

Greece punished once more

 


Thus, Greece, which was wronged in the allocation of resources for the 2014- 2020 period, as this was based on statistics for 2007-2009 (i.e. before the effects of the crisis emerged), is “punished” once more, as the reduced resources allocated to Greece for the 2014-2020 period cannot increase more than 8%. Yet it is not certain that even this 8% increase will be fully achieved, when the annual “cap” of 1.55% of GDP is taken into account. The Commission justifi es the “caps” by arguing that the overall reduction in Cohesion resources should not lead to drastic reductions in the overall funding of any member state, irrespective of changes in statistics, so as to avoid disrupting the member states’ development process. With the capping, the Commission is saving on resources in order to serve this purpose. This, however, inevitably wrongs other member states, as they do not enjoy the increases which they are entitled to and which their needs impose. The distorted eff ect of this approach and its adverse consequences for Greece emerges fully when Greece is compared to Portugal. For the 2021- 2027 period, per capita GDP and population remain as the basic allocation criteria, accompanied – with lower significance – by immigration. Nevertheless, it can be observed that Portugal, a country with a smaller population and a 13% higher per capita GDP compared to Greece, and without immigration problems, that is with less favourable allocation criteria, instead of receiving fewer resources, has a proposed allocation of 2 billion euros more than Greece, i.e. 10% more funds! Based on the above data, one could reasonably expect the exact opposite would be the case: that Greece would receive 10% more funds than Portugal, which translates to about 4 billion euros more than its allocation under the Commissions’ current pro-posal. In a more conservative version, if Greece were to receive at least as much as Portugal, it would still be entitled to 2 billion euros more than its allocation under the current proposal.

 

Brexit will prove expensive for Greece

Therefore, on top of Greece’s losses due to Brexit, consisting of (i) the increase by 224 million euros in its contribution to the EU budget for the two-year period 2019-2020 and (ii) the expected decline of its GDP by 0.3% to 1% over the same period, one must add the losses in Cohesion allocations, estimated at between 2 and 4 billion euros for the seven-year period 2021-2027. In short, Brexit will prove somewhat expensive for Greece. Could these losses for Greece be reduced or even eliminated altogether? The answer is no – at least not fully. There would nevertheless be scope for improvement in the situation as regards the Cohesion allocations, even in the form of exemptions in favour of Greece (in this respect, it should be noted that the exceptions in Structural Funds fiancing had actually become the norm in previous programming periods). There are many arguments for this, most notably the deep crisis that the country has gone through and the unprecedented drop by 25% in its GDP, which should not allow it to have less favourable treatment relative, for example, to Portugal. 

 

An opportunity for Greece to reposition itself within Europe

 


If Brexit is finalized and negotiations on the specific arrangements regarding the UK’s departure are launched, Greece will have to raise this issue. This should not exclude it from participating and perhaps even taking the lead in forming an alliance of member states that will push for a post-Brexit increase in the multiannual fi nancial framework, even if the latter has been adopted in the meantime. This is because, apart from its adverse consequences, Brexit may – in some cases – benefi t certain EU countries. For example, countries like Germany, France or Italy may reasonably be expected to see their intra-Community exports grow, precisely because the United Kingdom will have left the EU and the customs union and therefore, its access to the EU market will be under more adverse conditions. Perhaps this may explain the “comfort” with which, for example, France faces Brexit, without neglecting its expectation to remain the only nuclear power in the EU, with all the implications for its influence on EU decision-making. In this case, it would be reasonable to expect a part of the benefi ts to be reaped by these countries to be converted into additional contributions to the EU budget, serving to address the adverse consequences of Brexit for more disadvantaged EU countries. Many scenarios may come into play, depending on developments and on the ultimate format of Brexit. Yet in all ses, the negotiations on the conditions of the United Kingdom’s exit may also represent an opportunity for improving the functioning of the EU as it remains. In this respect, they may also represent an opportunity for our country to reposition itself within Europe. Yet even if Brexit is cancelled for good – which, in the author’s opinion, would be desirable – it will still represent an experience which the European Union should put to good use; especially regarding what needs to be done to ensure that this experience is not repeated for any other member state.

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