Greece’s creditors need a dose of reality – this is no time for European disunion
by Joseph Stiglitz – June 5, 2015
EU leaders continue to play a game of brinkmanship with the Greek government. Athens has met its creditors’ demands more than halfway. Yet Germany and Greece’s other creditors continue to demand that the country sign on to a programme proven to be a failure, and that few economists ever thought could, would, or should be implemented.
The swing in Greece’s fiscal position from a large primary deficit to a surplus was almost unprecedented, but the demand that the country achieve a primary surplus of 4.5% of GDP was unconscionable. Unfortunately, at the time that the “troika” – the European commission, the European Central Bank and the International Monetary Fund – first included this irresponsible demand in the international financial programme for Greece, the country’s authorities had no choice but to accede to it.
The folly of continuing to pursue this programme is particularly acute, given the 25% decline in GDP that Greece has endured since the beginning of the crisis. The troika badly misjudged the macroeconomic effects of the programme they imposed. According to their published forecasts, they believed that, by cutting wages and accepting other austerity measures, Greek exports would increase and the economy would quickly return to growth. They also believed that the first debt restructuring would lead to debt sustainability.
The troika’s forecasts have been wrong, and repeatedly so. And not by a little, but by an enormous amount. Greece’s voters were right to demand a change in course, and their government is right to refuse to sign on to a deeply flawed programme.
Having said that, there is room for a deal: Greece has made clear its willingness to engage in continued economic overhaul, and has welcomed Europe’s help in implementing some of them. A dose of reality on the part of Greece’s creditors – about what is achievable and about the macroeconomic consequences of different fiscal and structural changes – could provide the basis of an agreement that would be good not only for Greece, but for all of Europe.
Some in Europe, especially in Germany, seem nonchalant about a Greek exit from the eurozone. The market has, they claim, already “priced in” such a rupture. Some even suggest it would be good for the monetary union.
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