With Greece’s economic crisis still raging, prominent voices, ranging from Nobel laureate economists like Paul Krugman to officials like US Secretary of the Treasury Jack Lew, are calling for more lenient bailout terms and debt relief. Even the IMF — which, along with other European lenders, has provided Greece with emergency financing — recently joined the call. Could such an approach really be the proverbial silver bullet for Greece’s crisis?
The short answer is no. While Greece’s public debt is undeniably high, and evidence abounds that high debt can hold back economic growth, the country faces even stronger drags on growth, including structural weaknesses and political brinkmanship, that must be addressed first.
In fact, Greece is likely to depend on concessional funding from official sources in the years ahead — funding that is conditional on reforms, not debt ratios. Greece’s nominal debt stock would only matter once the country re-enters the debt markets and becomes subject to market, not concessional, borrowing terms. In the meantime, Greece must implement the structural reforms needed to restore the country’s long-term growth prospects and thus to strengthen its capacity to repay its creditors without a large nominal debt reduction.
There is another critical reason why debt relief is not the answer, and it lies in the political architecture of the European Monetary Union. Because the eurozone lacks a strong central governing body, crisis policies emerge from a political process in which each of the 19 member states has veto power. For such a complex system to work, eurozone policymakers must be able to trust one another to behave in a particular way — and that requires a common framework of rules and standards.
A restructuring of Greece’s official debt, despite offering short-term benefits, would weaken that framework in the long run by setting a precedent for exceptions, with other eurozone countries, sooner or later, requesting the same concession. In 2013, the extension of Greece’s loan maturities prompted Ireland and Portugal to demand — and receive — comparable extensions, despite their less obvious need.
Instead of offering concessions, which could create long-term instability in the eurozone, Europe’s leaders must remain committed to creating strong incentives for all member states to maintain prudent fiscal policies capable of reducing public debt ratios and restoring fiscal buffers against asymmetric shocks to the currency union. Only then could the eurozone have a chance of upholding the Lisbon Treaty’s “no bailout” clause.
Greece may account for less than 2 percent of eurozone GDP, but the pursuit of shortsighted ad hoc solutions to its problems might set precedents that could bring down the entire monetary union. To prevent such an outcome, it is critical that any solution to the Greek crisis reinforces, rather than undermines, the eurozone’s cohesion.
It is true that Greece has had to undergo painful adjustments to address its deep structural weaknesses, unsustainable public finances and lack of price competitiveness — adjustments that led to a drop in Greek output. However, high unemployment and a lack of investment cannot be blamed on the medicine prescribed; they are symptoms of the country’s failure to reform its public administration and to enhance the flexibility of its economy.
The international debate about how much austerity is appropriate to balance the interests of Greece and its creditors has distracted policymakers for too long. It is time to focus on the real imperative: designing and implementing vital structural reforms, at the national and European levels.
To guide this process, the German Council of Economic Experts has developed a set of reforms called Maastricht 2.0 that would reinforce the rules-based framework that is so essential to the eurozone’s long-term success. For example, the banking union needs to be strengthened through an enhanced resolution regime and an integrated financial supervisor and a sovereign insolvency mechanism should be introduced.
Underpinning the proposed reforms is the so-called “principle of unity of liability and control,” which demands that both the power to make decisions and liability for their consequences are kept at the same political level, be it national or supranational. In other words, if countries want to make their own fiscal decisions independent of their eurozone partners, they cannot expect those partners to step in and save them later.
To be sure, in recent years the European institutional framework has undergone major reforms that reflect the principles of Maastricht 2.0, such as the need to emphasize national responsibility for public finances and international competitiveness. However, the reform process remains far from complete.
There is no denying that short-term measures to address acute problems — such as debt relief for Greece — threaten the eurozone’s long-term stability. If the European Monetary Union is to survive and ultimately thrive, its leaders must not be tempted by facile solutions.
Christoph Schmidt is chairman of the German Council of Economic Experts, an independent academic body advising the German government, and president of the Rheinisch-Westfalisches Institut for Wirtschaftsforschung (RWI) Essen, one of Germany’s leading economic research institutes.
Copyright: Project Syndicate
Because much of what former US president Donald Trump says is unhinged and histrionic, it is tempting to dismiss all of it as bunk. Yet the potential future president has a populist knack for sounding alarums that resonate with the zeitgeist — for example, with growing anxiety about World War III and nuclear Armageddon. “We’re a failing nation,” Trump ranted during his US presidential debate against US Vice President Kamala Harris in one particularly meandering answer (the one that also recycled urban myths about immigrants eating cats). “And what, what’s going on here, you’re going to end up in World War
Earlier this month in Newsweek, President William Lai (賴清德) challenged the People’s Republic of China (PRC) to retake the territories lost to Russia in the 19th century rather than invade Taiwan. He stated: “If it is for the sake of territorial integrity, why doesn’t [the PRC] take back the lands occupied by Russia that were signed over in the treaty of Aigun?” This was a brilliant political move to finally state openly what many Chinese in both China and Taiwan have long been thinking about the lost territories in the Russian far east: The Russian far east should be “theirs.” Granted, Lai issued
On Tuesday, President William Lai (賴清德) met with a delegation from the Hoover Institution, a think tank based at Stanford University in California, to discuss strengthening US-Taiwan relations and enhancing peace and stability in the region. The delegation was led by James Ellis Jr, co-chair of the institution’s Taiwan in the Indo-Pacific Region project and former commander of the US Strategic Command. It also included former Australian minister for foreign affairs Marise Payne, influential US academics and other former policymakers. Think tank diplomacy is an important component of Taiwan’s efforts to maintain high-level dialogue with other nations with which it does
On Sept. 2, Elbridge Colby, former deputy assistant secretary of defense for strategy and force development, wrote an article for the Wall Street Journal called “The US and Taiwan Must Change Course” that defends his position that the US and Taiwan are not doing enough to deter the People’s Republic of China (PRC) from taking Taiwan. Colby is correct, of course: the US and Taiwan need to do a lot more or the PRC will invade Taiwan like Russia did against Ukraine. The US and Taiwan have failed to prepare properly to deter war. The blame must fall on politicians and policymakers