Finance: Research, Policy and Anecdotes

Groundhog Day is late this year in Greece, but Groundhog Day it is.  Some two years ago, I wrote a Vox column on the situation in Greece, titled Groundhog Day in Greece.  Reading it again, not much seems to have changed.  As the can is being kicked down the road, the Greek economy and society are not given a chance to exit the permanent crisis.  And as it looks like, there is little that anything will change for the better in the near future.

The situation in February 2017 feels indeed like Groundhog Day.  The same old discussion on debt sustainability (or the lack thereof as the IMF has pointed out correctly).  And increasing conflict between the creditors on whether and how much debt relief to grant Greece and at what point. The positions of IMF, on the one side, and the Eurozone countries, on the other hand, are not surprising.  IMF staff takes a purely technocratic view assessing the debt repayment capacity of the Greek government, but also taking into account political economy constraints, such of extremely low probability that a democratically elected government will be able to maintain a primary surplus of 3.5% over longer time periods. The latter has been clearly shown by Barry Eichengreen and Ugo Panizza in this Economic Policy paper.  And even if there might not be an immediate cash flow problem as often pointed out by Eurozone officials, simply delaying debt repayments amounts to kicking the can down the road, but not to solving any debt overhang. At the same time, the certainty of further stand-offs between Greece and its creditors down the road undermines economic recovery (which is ultimately needed for debt repayment).  A vicious cycle, indeed!    The European creditors’ view are backed by one economic and one (more important) political argument.  The economic argument is that of necessary reforms in Greece only being implemented if there is continuous pressure on the Greek government, pressure that would go away in the case of a big debt relief at this stage. However, the evidence over the past seven years should have clearly shown that reforms imposed from the outside simply do not work, no matter what the color of the Greek government and how long the list of reforms included in the Troika programs. The political argument is that of the upcoming elections in the Netherlands, France and Germany – governments simply do not want to recognize the losses they have already incurred.

The Greek crisis of the past seven years has been primarily and predominantly a political crisis where in the absence of an early debt restructuring and with banks having enough time to offload their Greek government debt to official creditors an initial fiscal crisis has turned into a stand-off between Greece and the rest of the Eurozone.   The political character of the crisis also suggests that it will not be the IMF that will carry the day with its analysis but the Eurozone creditors with their Groundhog Day approach and an early Monday morning solution, waking up the citizens of the Eurozone with the sound of a huge can being kicked down the road.

Solutions bridging these two approaches are available. One would be to move away from a program approach with loans-for-austerity/reform approach to imposing a hard budget constraint on Athens, i.e., no fresh loans, while at the same time delaying any repayment for at least five years. At the same time, one can envision a reduction in the Greek debt level over time linked to broad performance indicators reflecting institutional quality, macroeconomic management and openness of markets. Rather than focusing on individual laws and regulations, regarded as political interference and micro-management in Greece, broader performance indicators should be reviewed every few years and thus linked to further debt relief.  At the same time, it is critical that the link between Greek government and Greek banks is cut permanently, to thus reduce the risk that Greek depositors and banks are held hostage as they did in summer 2015.  I have made such a proposal here and Willem Buiter has made a similar proposal. This might finally turn the political back into a fiscal crisis.  Given the current circumstances, this might already be progress.

Overview