EUROPEAN FINANCE MINISTERS have agreed on another financial rescue plan for Greece, and this one is the biggest yet. It offers $172 billion worth of debt relief in return for Greek commitments to implement the sweeping austerity measures and structural reforms that it has often promised but not delivered.
Is bigger necessarily better? It depends on which of Europe’s announced goals you’re talking about. The plan may help “ring-fence” Greece — that is, prevent a Greek default from bringing down European banks and, with them, the continent’s economy. The key is a 70 percent write-down of most of the country’s debt held by the private sector, including banks but also investment funds, pensions and insurance companies. This alone will be worth $130 billion to Greece, if, as expected, all but a few holdouts accept the deal. Henceforth, governments and multilateral organizations will hold the largest proportion of Greek debt.
However, if the goal is to rekindle growth, without which neither Greece’s debt crisis nor the similar crises affecting Spain, Italy, Portugal and Ireland can be resolved — well, then the verdict is mixed at best. For Greece to have any chance to grow, it must eliminate the special-interest privileges, bureaucracy and corruption that have thwarted private-sector growth and eroded competitiveness for years. To the extent that European governments, headed by Germany, insisted on structural reform, the new program is not only justified but, in the long term, modestly promising.
Yet the plan also forces Greece to raise taxes, slash spending and shrink wages, which, in the short run, only compounds the brutal recession that it has been enduring since 2008. As a newly leaked International Monetary Fund analysis argues, austerity not only makes life miserable for the Greek people but also makes it harder to reduce Greece’s debt burden to 120 percent of gross domestic product by 2020, as intended. As the IMF analysis notes, “the Greek program may thus remain accident-prone, with questions about sustainability hanging over it.” Translation: In a country known for its economic errors, this plan leaves absolutely no margin for error.
Greece may be beyond rescue. With mutual distrust mounting in both Berlin and Athens, default and exit from the Eurozone may be the inevitable — and, indeed, tacitly contemplated — consequence of the next Greek failure to meet its debt-reduction goals. What really matters is the lesson that the rest of the continent draws from this harrowing episode, and that lesson is: There’s no substitute for vigorous growth. Greece’s fellow debtors need to press on with pro-growth structural reforms, even if it means disrupting long-standing protections for politically connected interests. Europe’s paymasters must reward their neighbors’ reform efforts with more than just grudging cash infusions and balanced-budget lectures. Germany, especially, needs to reduce its addiction to export-led growth, so that its European partners can gain market share. Structural reform must be a two-way street — or become a dead end.
Read more on this topic