The Greek crisis is a tragedy for the country and a danger for the world economy. Germany is demanding that Greece continue to service its debts in full, even though Greece is clearly broke and the IMF has noted the need for debt relief. The collision of reality (Greece’s insolvency) with politics (Germany’s demands) was bound to create a disaster.
Yet there still is a way out of this mess. Greece’s debt should be cut sharply and the country should remain within the euro zone.
In negotiations with its creditors this spring, Greece recognized this, insisting that its debt be reduced. Germany refused. Though the US and the IMF privately sided with Greece, Germany prevailed, as creditors usually do.
Yet creditors sometimes prevail to their own detriment; by pushing the debtor to the breaking point, they end up bringing about a complete default. Germany’s mistake this past week was to push the Greek economy into a complete financial collapse.
Indeed, a euro exit would be remarkably costly for Greece, and would almost certainly create political and social chaos — and perhaps even hyperinflation — in the heart of Europe. The value of Greek residents’ savings would be slashed, as euros were suddenly converted into New Drachmas. The middle class would be eviscerated. And the currency conversion would not save the country one cent with regard to its external debt, which would, of course, remain denominated in euros. Still, Greece’s debt burden is unsustainable. This week, Greece defaulted on its payments to the IMF, rightly choosing pensions over debt service. The country’s creditors should now negotiate a consensual debt reduction through some combination of lower (and fixed) interest rates, reduced face value of debt, and very long maturities.
There are plenty of precedents for such a course. Sovereign debts have been restructured hundreds, perhaps thousands, of times — including for Germany. I propose a four-step path out of the Greek crisis. First, I recommend that the Greek people give a resounding “No” to the creditors in the referendum on their demands this weekend. Second, Greece should continue to withhold service on its external debts to official creditors in advance of a consensual debt restructuring later this year. Given its great depression, Greece should use its savings to pay pensioners, provide food relief, make crucial infrastructure repairs, and direct liquidity toward the banking system. Third, Prime Minister Alexis Tsipras must use his persuasive powers to convince the public, in the style of US President Franklin D. Roosevelt, that the only thing they have to fear is fear itself. Specifically, the government should make clear to all Greeks that their euro deposits are safe; that the country will remain within the euro zone; and that its banks will reopen immediately after the referendum. Finally, Greece and Germany need to come to a rapprochement soon after the referendum and agree to a package of economic reforms and debt relief. No country should expect to be offered debt relief on a silver platter; relief must be earned and justified by real reforms that restore growth, to the benefit of both debtor and creditor. And yet, a corpse cannot carry out reforms. That is why debt relief and reforms must be offered together, not reforms “first” with some vague promises that debt relief will come in some unspecified amount at some unspecified time in the future.
Easing Greece’s debt burden while keeping the country within the euro zone is the correct and achievable path out of the crisis, and it can be accomplished easily through a mutual accord between Germany and Greece. The result would be a win not only for those countries, but also for the world economy.
©Project Syndicate
