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
Two sets of economic data released last week by the Directorate-General of Budget, Accounting and Statistics (DGBAS) have drawn mixed reactions from the public: One on the nation’s economic performance in the first quarter of the year and the other on Taiwan’s household wealth distribution in 2021. GDP growth for the first quarter was faster than expected, at 6.51 percent year-on-year, an acceleration from the previous quarter’s 4.93 percent and higher than the agency’s February estimate of 5.92 percent. It was also the highest growth since the second quarter of 2021, when the economy expanded 8.07 percent, DGBAS data showed. The growth
In the intricate ballet of geopolitics, names signify more than mere identification: They embody history, culture and sovereignty. The recent decision by China to refer to Arunachal Pradesh as “Tsang Nan” or South Tibet, and to rename Tibet as “Xizang,” is a strategic move that extends beyond cartography into the realm of diplomatic signaling. This op-ed explores the implications of these actions and India’s potential response. Names are potent symbols in international relations, encapsulating the essence of a nation’s stance on territorial disputes. China’s choice to rename regions within Indian territory is not merely a linguistic exercise, but a symbolic assertion
More than seven months into the armed conflict in Gaza, the International Court of Justice ordered Israel to take “immediate and effective measures” to protect Palestinians in Gaza from the risk of genocide following a case brought by South Africa regarding Israel’s breaches of the 1948 Genocide Convention. The international community, including Amnesty International, called for an immediate ceasefire by all parties to prevent further loss of civilian lives and to ensure access to life-saving aid. Several protests have been organized around the world, including at the University of California Los Angeles (UCLA) and many other universities in the US.
In the 2022 book Danger Zone: The Coming Conflict with China, academics Hal Brands and Michael Beckley warned, against conventional wisdom, that it was not a rising China that the US and its allies had to fear, but a declining China. This is because “peaking powers” — nations at the peak of their relative power and staring over the precipice of decline — are particularly dangerous, as they might believe they only have a narrow window of opportunity to grab what they can before decline sets in, they said. The tailwinds that propelled China’s spectacular economic rise over the past