Greece has made yet another other deal with the EU and IMF on its debt situation. Or rather as one EU official described it to the Financial Times “If it looks like we are kicking the can down the road that is because we are”.
Said in another way, this is not really a deal to solve the fundamental problem, but rather a deal to avoid dealing with the fundamental problem.
So what is the fundamental problem? Well, at the core of this is that the Greek government simply is insolvent and can’t pay its debts, but at the same time the EU is refusing to accept this fact.
The IMF seems to understand this and probably so do the eurocrats, but politically it seems impossible to accept because that would mean the EU would have to accept that the strategy to deal with Greece’s problems has been wrong and it would mean accepting a major debt write-down on Greece sovereign debt something with likely would not be popular with voters in for example Germany or the Netherlands.
Some are arguing that Greece haven’t done enough to solve its own problems and that letting Greece off the hook with a major debt write-down would just encourage even more bad habits and that is probably right, but it does change the fact that it is very hard to see how Greece will be able to pay of the debt.
Furthermore, it is wrong when some are arguing that Greece hasn’t done anything. In fact, Greece has done more fiscal austerity than any other nation in Europe. So if we for example look at the accumulative tightening of fiscal policy in Greece since 2009 then we will see that Greece in this period has tightened by 18-20% of GDP (measured as the accumulative change in IMF’s measure of Greece’s structural budget deficit). By any measure, this a massive fiscal tightening.
However, one thing is the effort another thing is the outcome and here the story is quite different. Hence, since 2009 Greek public debt has grown from 108% of GDP in 2008 to more 180% of GDP this year. Hence, despite of massive fiscal austerity public debt has continued to grow every single year since 2008.
The reason for this depressing development is the fact that Greece has seen a massive collapse in economic activity. Hence, since 2008 nominal GDP in Greece has dropped by nearly 30%. A true economic disaster. No matter how fiscally conservative a country is it is impossible to stabilize the debt ratios with such an economic contraction.
Therefore, to fundamentally solve Greece’s debt problem it is needed to solve Greece’s growth problem and that is not easy. Fiscal stimulus could of course be a solution, but Greece don’t have the money for that and the markets will not be willing to finance a fiscal stimulus package.
Another solution is massive structural reforms and that is somewhat more promising that fiscal stimulus, but given the depth of the crisis even the most comprehensive reform package is not likely to be enough and that leaves on one solution – monetary easing.
But since Greece is not in control of its own monetary policy because the country is a member of the euro zone that is not really possible either. Or rather it is – if Greece decides to leave the euro area. That seems like a very risky strategy, but it is blatantly obvious that this is really the only solution that would work.
Therefore, it is not a question whether we will get a ‘Grexit’, but rather when it will happen. The German taxpayers will not forever be willing to pay the price for kicking the can down the road.
PS Marcus Nunes also comments on Greece.
PPS The IMF has a new paper, which once again shows that Greece is insolvent and urgently needs a debt write-down.
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