Greece is on the brink. Lack of European Union (EU) oversight over Maastricht Criteria compliance by the Economic and Monetary Union (EMU, eurozone) members has caused the Greek crisis. Neither Europe nor Greece wants Greece out of the eurozone. The negotiations for the last tranche of the bailout funds before the bailout expires at the end of June are predicated on a solution to the Greece structural reform problem that is mutually agreeable to the governing Alexis Tsipras’ Syriza party and the troika of the International Monetary Fund (IMF), European Commission (EC) and the European Central Bank (ECB).
The bailout terms for troika lending are generous in the amount of time given to Greece to repay the 240 billion euros. The country has until beyond 2050 to repay the loans (see The Economist chart below).
The chart below shows that the overall Greek indebtedness is 340 billion euros.
What Greece needs, beginning now, is the same amount of time, until beyond 2050, to implement structural reforms that are agreeable to the Greek people and the troika. If Greece has two generations to repay the debt, it is only fair that it also be given two generations to reform.
Focus, while releasing the final tranche of the bailout funds by the end of June, should be on both sides – the troika of lenders and the borrower Greece – coming to a consensus on the reforms. Instead, the troika, counting on the principle of the irrevocability of the eurozone, is imposing upon the Greek people its version of reforms. And Greece, counting on the same principle, is negotiating for a better deal with the troika which includes debt restructuring and debt relief. The EU has a choice to make: let Greece default on all its debt and exit the eurozone or give Greece debt relief and keep it within.
The reality is that Greece, to return to economic health over time, needs both debt restructuring and debt relief in spite of the troika imposed austerity – austerity alone is not enough. Even the IMF now says, in concurrence with Mr Tsipras’ latest letter to the troika, that Greece needs a third bailout and debt restructuring together with structural reform to return to a salutary economic condition in the long run.
More importantly, any fiscal austerity and structural reform of government must be accompanied by increased private investment to set Greece on a pro-growth path for the debt-to-GDP ratio to be sustainable. This has not happened thus far.
Greece, for a new beginning, always has the option of exiting the eurozone by defaulting on all of its debt. And that could come to pass once all the brinkmanship is over.
(Chart credits: CNBC.com)
The eurozone, after all, may not be irrevocable. The EMU needs better supervision of member countries’ public finances and a fiscal union for the eurozone to be truly irrevocable. In the interim, wayward members such as Greece exiting the eurozone is the option with the least moral hazard for the EMU.