European Union leaders continue to play a game of brinkmanship with the Greek government. Greece has met its creditors’ demands far more than halfway. Yet Germany and Greece’s other creditors continue to demand that the country sign on to a program that has proven to be a failure, and that few economists ever thought could, would, or should be implemented.
The swing in Greece’s fiscal position from a large primary deficit to a surplus was almost unprecedented, but the demand that the country achieve a primary surplus of 4.5% of gross domestic product was unconscionable, Joseph E. Stiglitz wrote for Project Syndicate.
Unfortunately, at the time that the “troika” — the European Commission, the European Central Bank, and the International Monetary Fund — first included this irresponsible demand in the international financial program for Greece, the country’s authorities had no choice but to accede to it.
The folly of continuing to pursue this program is particularly acute now, given the 25% decline in GDP that Greece has endured since the beginning of the crisis. The troika badly misjudged the macroeconomic effects of the program that they imposed.
According to their published forecasts, they believed that, by cutting wages and accepting other austerity measures, Greek exports would increase and the economy would quickly return to growth. They also believed that the first debt restructuring would lead to debt sustainability.
The troika’s forecasts have been wrong, and repeatedly so. And not by a little, but by an enormous amount. Greece’s voters were right to demand a change in course, and their government is right to refuse to sign on to a deeply flawed program.
Room for Deal
Having said that, there is room for a deal: Greece has made clear its willingness to engage in continued reforms, and has welcomed Europe’s help in implementing some of them. A dose of reality on the part of Greece’s creditors — about what is achievable, and about the macroeconomic consequences of different fiscal and structural reforms — could provide the basis of an agreement that would be good not only for Greece, but for all of Europe.
Some in Europe, especially in Germany, seem nonchalant about a Greek exit from the eurozone. The market has, they claim, already “priced in” such a rupture. Some even suggest that it would be good for the monetary union. It is believed that such views significantly underestimate both the current and future risks involved.
Indeed, the world’s financial system is still feeling the aftershocks of the Lehman collapse in 2008. And banks remain non-transparent, and thus at risk.
In Europe, one can already see some of the consequences of inadequate regulation and the flawed design of the eurozone itself.
