A lot of hand-wringing has been going on since the Greeks elected Syriza, the leftist anti-austerity party, to lead its new government. It seems that the Greek people, while preferring to remain in the “eurozone,” have had their fill of the the harsh medicine that public and private lenders are imposing as conditions to a liquidity lifeline. To sum things up, Greece, the European poster child for public corruption, fiscal profligacy, and tax evasion, can’t pay its bills as they come due. European banks and public institutions such as the IMF and ECB have continued to finance debt restructuring (including interest rate reductions and maturity extensions) in exchange for commitments to cut public spending and raise taxes. Greeks understandably complain that the austerity measures make it even harder to generate the new revenues needed to make good on its piled up debts. What’s an honest spendthrift nation to do?
Two schools of thought have emerged on the issue.
One side argues that everyone needs to bite the bullet and let Greece default, exit the currency union, re-denominate accounts in drachma, and let the comparatively cheap currency lubricate the economy with tourism and trade. This point of view suggests that further bailouts simply delay the inevitable. While a “Grexit” would cause tremendous harm to domestic savings and purchasing power — not to mention bring renewed scrutiny to other weak eurozone economies — continuing to finance Greek debt throws good money after bad. Politically it’s untenable in Northern Europe. Let the chips fall and get on with it, these tough-love advocates insist.
The other side cautions that politics and rhetoric need to be kept in check. Be careful what you ask for, they seem to be saying. Letting Greece default would reignite eurozone “contagion,” throwing the entire European project into jeopardy. While Greece represents only a small part of the world economy, default would trigger pressure on Spain, Portugal, and Italy, among others. Capital would flee, interest rates would soar, and there would not be enough collective resources to bail out everyone. The export industries that have powered Germany over the past decades would lose their fuel. Continue to shelter the ne’er-do-well Greeks to prevent a Continental melt-down.
Is it too much to ask that policymakers entertain a third way out of this mess, one that is premised on support for shared economic prosperity? Why is it that they must choose between the moral hazard of rewarding fiscal irresponsibility and shooting themselves in the foot by bringing the house crashing down? Yes, the Greek people need to learn to live within their means. Yes, they need to reduce the public sector and free up labor markets. And by and large, there has been very little genuine reform to the Greek economy. But even if the political leadership had pushed such reform through, why should it be pressed to add punitive tax hikes? Higher taxes simply exacerbate the evasion problem and deter whatever business investment liberal reforms would otherwise inspire. Why not unshackle the Greek economy with dramatic reductions of tax and regulation? Give the Greek people a reason to believe in themselves and to hope for a better future.
While we are at it, let’s not condition further liquidity support on static budget arithmetic. Changes which liberate the private sector and spur sustainable growth will rejigger the budget calculus. Here in the U.S., Republicans in Congress are finally ensuring that fiscal responsibility be assessed while taking measure of productivity. It’s time for the powers that be to stop treating Greece as if it operated in an economic vacuum. Economic growth will be the cure of many ills — let’s use our influence to support it.
3 responses to “Brother, can you spare a drachma?”
Your excellent suggestion for a 3rd approach assumes Europe is ready & resigned to a social and economic experiment that scares most US state governments.
Interesting read. I have been following the situation and wonder how it is going to get resolved.
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