Experts react to Europe’s bailout package for Greece
By the Wonk Blog staff,
Late Monday night, the euro zone agreed to a $170 billion bailout package for Greece in exchange for certain budgetary oversight measures and economic reforms. We asked a group of experts and economists to weigh in on the deal — and whether it’s enough to hold Greece — and Europe — together. Here are their reactions:
Greece is bailed out — for now.
“Will the deal work? With this deal, Greece has only overcome the first of several hurdles. It remains to be seen whether the package will continue to be challenged by strikes and protests. Even then, there must be questions as to whether the necessary structural reforms can be implemented in a full and effective manner by an underperforming administrative system.
“At the same time, it is very important to question the content and schedule of the package being imposed on Greece by the Troika [the International Monetary Fund, European Commission and European Central Bank]. It stresses clumsy across the board cuts calibrated by fiscal constraints, rather than a coherent set of choices that might lead Greece towards a better model. In this sense, the package is too closely set to appease the insularity of foreign voters, rather than to achieve the shared interest of returning Greece to growth and putting the euro-zone on a more solid basis. In time, this bias will need to be adjusted.”
Vincent Reinhart, economist at the American Enterprise Institute, and Carmen Reinhart, economist at the Peterson Institute for International Economics:
Policymakers and investors seem to have taken some solace from the announcement that European financial ministers have agreed to a bulked-up rescue package to stave off Greek default. No doubt, the deal enhances the probability that Greece will be able to squeak past its major debt refunding on March 20. This is good news regarding the prospect for immediate financial strains. However, near-term challenges abound, including convincing investors to share enough losses to make the fiscal arithmetic square, bank depositors in Europe that there funds remain safe, and politicians in the richer countries that directing more resources to keep the euro project afloat is still a wise decision.
Even after navigating the near-term shoals, the long-term outlook for Hellenic fiscal sustainability remains doubtful.
Recognize that “success” requires the government work down its debt relative to nominal income from the current lofty level of around 160 percent to 120.5 percent by 2020. (By the way, the false precision in that goal, forecasting a concept that has proved so slippery as the Greek debt burden to the 1/2 percentage point nine years out, shows that there is an unreality about the exercise.) The consolidation of the government sector, the reduction in benefits, and toughened tax collection efforts will almost surely extend the ongoing Greek contraction. Such declines in income will create serious headwinds in making meaningful progress in deficit reduction, a point we made about two years ago in the Washington Post. Moreover, if the Greek government ever gets to that long-run goal, work by Carmen and Ken Rogoff has shown that debt loads even lower than that have been associated with markedly slower growth in income. Thus, the rescue offers Greece the opportunity for an extended struggle to settle for slow economic growth for an extended period. This debt crisis is not over...
Dmitri Vayanos, professor of finance at the London School of Economics:
While the bailout plan takes care of Greece’s funding needs in the short run and puts Greek banks on a sounder footing, it does not offer a full solution to Greece’s problems. The solution is a comprehensive programme of deep structural reforms. If these reforms do not take place, Greece is bound to default in the future. I am quite concerned by this possibility. Greece does not have the capacity to perform many of the reforms — partly because many of its politicians do not believe in them or stand to lose from them personally, and partly because the capacity of Greece’s already inefficient public administration has further been weakened by the austerity cuts. Moreover, Greece’s foreign partners have mainly focused so far in the fiscal targets that Greece must meet, and have not given enough emphasis on the deeper institutional reforms that Greece needs to exit the crisis.
Henry Farrell, associate professor of political science at George Washington University:
The bailout will work — if by “working” you mean putting off the really hard decisions for another month or two. It doesn’t solve the fundamental economic and political problems of the eurozone, nor is it designed to. Not even its designers think that it will solve the economic problem. It is based on ludicrously optimistic assumptions, which were clearly chosen in order to produce the desired outcome. The political problem is only getting worse. As I and John Quiggin predicted in Foreign Affairs last year, imposed austerity is souring politics between Eurozone member countries, and encouraging extremists to come to the fore. Europe needs to reinvent its democratic model if it is going to create any genuine economic government. Yet each concrete step that it takes to limit democracy moves it further away from doing this. If whispers are to be believed, German politicians are far more aware of this dilemma than they let on in public, but they obviously have not figured out any way to solve it
Nicolas Veron, senior fellow at Bruegel, a Brussels-based think tank:
This agreement does not set Greece on a sustainable track, and more pain is sure to come down the road — both in terms of Greece temporarily losing its sovereignty, and in terms of further debt restructuring which from now has to involve the official creditors, namely Eurozone taxpayers. The agreement is however much better than the alternative, which would have been a disorderly Greek default with possibly disruptive consequences for the global financial system. Therefore it has to be considered a success, but by no means a resolution of the crisis, either for Greece or for the Eurozone as a whole.
Mohammed el-Erian, co-chief executive of Pimco:
After several technical iterations and too many rounds of political threats and accusations, the three parties to a Greek solution finally agreed on yet another bailout. But they did so for negative rather than positive reasons and, accordingly, this agreement is likely to follow its predecessors and fall apart in the weeks ahead.
The latest agreement, while better designed in parts, leaves Greece’s basic problem unresolved: The country still faces the prospects of too much debt and way too little growth. As a result, this is yet another attempt to sustain the unsustainable.
I suspect that the three parties to the agreement — representatives of Greece, of its official creditors and of private creditors — know this. It is one reason why no single party, or the three collectively, feel they sufficiently “own” the approach being pursued. So don’t expect them to go out of their way again the minute it hits a bump on the road to full implementation, as inevitably it will.
Despite all this, none of the three parties wishes to go down in history as having forced a change in approach, even though this could lead to a more sustainable path. They would rather have this forced on them by “unfortunate circumstances.” Why? Because such a change involves a high probability of a disorderly debt default in an advanced European country, as well as the possibility of an exit from the Eurozone.
All this would be academic — or even desirable as it gives the rest of Europe time to build financial and economic defenses -- if it weren’t for real and durable costs.
The Greek people, and especially those in the middle and lower income classes that are least able to protect themselves, will suffer as they are asked to sacrifice again via austerity without the prospects of benefits down the road. The credibility of the ECB and IMF, two monetary institutions that are important for the wellbeing of the global economy, will take another hit, as will their legitimacy. And the political unity of Europe will be put under even more pressure as the blame game intensifies.
The three parties may have come to an agreement. But its impact will fall short of what is needed. Further thoughts here.
Richard Portes, economist at London Business School:
The bailout will fail even if debt restructuring attracts sufficient creditor support now and CDS are not triggered (both uncertain). Debt reduction seriously inadequate. Greece will need more official support, sooner rather than later. The politics are poisonous too, in Greece and in eurozone. Better a really deep but orderly debt reduction and no more official support except to recapitalise Greek banks and make it feasible to stay in euro. Then they are on their own, with ‘ownership’ of their own program, and maybe the shock will catalyse the major institutional reforms needed to restore the Greek economy, whose problems are microeconomic, social and political, not the exchange rate or monetary policy.
Barry Eichengreen, economist at the University of California Berkeley:
It won’t work. There is absolutely no margin for error: everything has to go perfectly in order for the scenario sketched in the agreement to materialize. And we know that absolutely everything going perfectly is not how things work in the real world. At most, European leaders have bought a couple of quarters to contemplate what comes next. But, as we’ve learned, that’s the nature of the European political process.
Simon Johnson, co-author of “White House Burning” (to be published in April):
The Greek debt restructuring is very unlikely to work, in the sense that further trouble lies ahead — including probably another restructuring of their national debt. The main problem is that it will be very difficult for Greece to grow under the agreed program — debt remains very high, taxes will be high and distortive, emigration will be substantial, and there will not be the kind of export boom that often helps countries snap back from deep crises.
The designers of this so-called “bailout” are European politicians who are desperately trying to deflect scrutiny from the broader mismanagement of the Eurozone – including the looming problems in Portugal, Ireland, and Italy. They may have bought themselves some time, but how much? The Obama administration must be feeling very nervous. The European crisis will likely soon worsen – but does “soon” mean before or after November 6, 2012?
Desmond Lachman, American Enterprise Institute fellow:
At best the IMF-EU bailout package will stave off a disorderly Greek default for three to six months. It is fanciful to think that the application of the same failed policy prescription of hair shirt fiscal austerity in a currency union will work any better this time around than it did over the past two years. The limits will soon be reached as to how much further pain Greece can withstand and how much longer Greece’s body politic can continue with economic policies that are literally driving the Greek economy into the ground. It would seem highly probable that Greece will seek a new policy direction after its next election which will probably occur in April. And the IMF and EU will find out how little they got for the EUR 90 billion they spent in their futile effort to prevent the inevitable disorderly default and Greek exit from the Euro.
Paolo Manasse, professor of economics, University of Bologna:
The new package is a combination of "new money", the troika's new package, and partial "debt forgiveness," the 53.5 haicut on nominal value plus coupon reduction (much more in present value). It's a result of a comprimise between EU tax-payers' and EU banks' money. Given the plain insolvency of Greece, a much more ambitious debt forgiveness (haircut on principal and interests) would have been required to put Greece on a solvent path. The objective of reducing the debt/Gdp ratio to 120% by 2020 is completely unrealistic. The difference between the average real interest rate on the debt and the rate of growth is unlikely to fall below 5 percentage point in the next few years and that alone would require a permanent primary surplus of 6% ! (=5 x 1,2) even if the debt/GDP could be shrunk overnight to the 120% target. As Greek debt will be in the hands of EU institutions (and IMF) access to the capital market will not be restored in the forseeble future, as new debt will become inevitably junior. Even if reached, the ambitious 120% target will make Greece vulnerable to all kinds of shocks. Either new money will be needed soon (after 2013 German election?) or Greece may exit the Euro.
Elias Papaioannou, economist at Dartmouth College, Harvard University, NBER and CEPR:
The bailout plan can work — and by “work” here I mean restoring the competitiveness of the Greek economy so as to bring down the unacceptably high unemployment, reduce rising poverty, and bring some glimpse of hope for restoring growth. Yet this does not imply that the plan will work. From a purely technical standpoint, there are three immediate conditions. First, the Greek political system with the active involvement of the all Greeks needs to produce primary budget surpluses. Second, the Greek economy needs to quickly opt out from the vicious cycle of recession and unemployment via implementing long-delayed structural reforms mostly on product markets and the functioning of the state. Third, the recapitalization of the local banking system needs to be accompanied by an operational restructuring and the clean-up of bank’s books. Meeting these conditions is quite hard. Unfortunately, the myopic focus of the IMF/ECB/EU “troika” on austerity and illusionary during a recession fiscal targets, the polemic rhetoric of some key EU officials against the deeply suffering Greek people, and the failure of the previous Greek administrations to proceed aggressively with the necessary reforms make the success of the current plan quite unlikely. The Greek people are suffering, while at the same time there seems to be no way out of the current devastating situation.
In spite of these issues, the bailout plan can work; this, however, will only happen if it is accompanied by a complementary institutional and growth plan that will take into account the idiosyncratic characteristics of the Greek economy. In a nutshell, the accompanying plan needs to have the following ingredients.
First, if the plan is to have legitimacy and thus some chance to work, it has to be designed by Greeks. Given the total mistrust of the Greek people towards both the “troika” and the local political elite, the current government should appoint with the consensus of the Parliament a high level committee led by Greek academics, entrepreneurs and business leaders (ideally from the thriving Greek diaspora to avoid local capture) to come up with a comprehensive ten year plan to revive the economy. Second, the program has to be broad and ambitious, and not focus on fiscal and purely economic measures. The plan has to include targeted policies in all aspects of the state: speeding the absurdly-slow justice system, reforming the anachronistic bureaucracy, tackling corruption in municipalities, enforcing policing, designing new educational policies, and much much much more. Third, the plan has to specify how its provisions will be implemented by the malfunctioning state. Any plan is doomed to fail if incentives between state officials, national and local politicians, and the people are not aligned. For example tax revenues have to be directly linked to specific expenditures.
The deep causes of the Greek crisis lie in its poorly functioning institutions that have steadily made Greece a weak state that is unable to collect taxes, enforce the law, and protect its citizens. Any plan that simply focuses on fiscal measures and ignores this reality is doomed to fail. In the same vein any plan that abstracts from implementation is worthless. Hopefully the mistakes of the international community and the Greek administration over the past two years will not be repeated. Hope springs eternal!
Ezra Klein, Suzy Khimm, Sarah Kliff and Brad Plumer contributed to this post.