MARTIN WOLF | Financial Times
Chief economic commentator
Sometimes it is right to do the smart thing. That is the current case of Greece . If done well, the debt reduction benefit Greece and the rest of the eurozone. It is true that create difficulties. But they would be less treated than if Greece is thrown to the wolves. Unfortunately, such an agreement may be impossible. That is why the belief that the eurozone crisis is over is wrong.
No one should be surprised by the victory of the leftist Syriza Greece . Amid a “recovery”, it was reported that unemployment is 26 percent of the workforce and youth unemployment is above 50 percent. Gross domestic product is also 26 percent below its pre-crisis peak. But GDP is a particularly inadequate measure of the fall in economic-being goods in this case. The current account balance was negative 15 percent of GDP in the third quarter of 2008 but has been in surplus since the second half of 2013. So the Greeks spending on goods and services has actually fallen by at least 40 percent.
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Before this disaster, it is not surprising that voters have rejected the previous government and policies, although half, chasing instances of creditors. As said Alexis Tsipras, the new prime minister, Europe is based on the principle of democracy. He has spoken the village of Greece . The powers need at least pay attention. However, all that is heard suggests that the demands of a new agreement on debt and austerity will be more or less rejected outright. What encourages that answer is a lot of sanctimonious nonsense. Particularly two moralists proposals stand in the way of a reasonable response to the Greek demands.
FALSE PROPOSALS
The first proposal is that the Greeks borrowed the money and therefore have an obligation to return, regardless them. This was the attitude of debtors prisons. However, the truth is that creditors have a moral responsibility to give wisely. If they do due diligence of borrowers, they deserve what happens. In the case of Greece , the magnitude of the external deficits, in particular, were evident. So was the way it was ruled Greece.
The second proposal is that since the crisis erupted, the rest of the eurozone has been extraordinarily generous with Greece . This is also false. It is true that the loans provided by the eurozone and the International Monetary Fund amount reached a whopping 226.7 billion euros (about 125 percent of GDP), which is about two thirds of total public debt 175 percent of GDP. But this almost entirely was not to benefit the Greeks, but to prevent the reduction in value of doubtful loans to the government and the Greek banks. Only 11 percent of the loans directly financed government activities. Another 16 percent was used for interest payments. The remainder was used for capital transactions of various kinds: the money came in and then out again. A more honest policy been bailing out lenders directly. But this would have been too embarrassing.
As the Greeks say, the debt relief is normal. Germany, a defaulter series of internal and external debt in the 20th century, has been a beneficiary of this. Not going to pay what you can not afford. The idea that the Greeks huge fiscal surpluses recorded for a generation to return the money to the creditor governments used to rescue his madness private lenders is somewhat delusional.
So what to do? You have to choose between right, desirable and dangerous as
As Reza Moghadam, former director of the European Department of the International Monetary Fund says. “Europe should provide substantial relief debt – thus halving debt Greece and half the fiscal balance requerido- in exchange for reform. ” He added that this would be consistent with debt considerably below 110 percent of GDP, which the eurozone ministers agreed in 2012. But these reductions should not be made unconditionally. The best approach is established in the initiative “heavily indebted poor countries,” the IMF and the World Bank, which began in 1996. Under this, debt relief is granted only after the country meets specific criteria for reform. Such a program would be beneficial for Greece , which requires political and economic modernization.
The politically expedient approach is to “extend and pretend”. Undoubtedly, there are ways to keep postponing the day of reckoning. There are also ways to reduce the present value of the interest and depreciation without lowering the nominal value. This would allow the eurozone avoid facing the moral argument debt relief from other countries affected by the crisis, especially Ireland. However, this approach can not reach the honest and transparent outcome is urgently needed.
The dangerous approach is to push Greece to the default. This probably causes a situation in which the European Central Bank no longer feel able to operate as a central bank of Greece. That therefore require an exit. No doubt the result would be catastrophic for Greece in the short term. I think also that too would reverse any progress towards modernity for a generation.
But the damage not only be for Greece . They show that monetary union in the eurozone is not irreversible but simply sets a hard peg exchange rate. That would be the worst of both worlds: the rigidity of fixed exchange rates without the credibility of monetary union. In each future crisis, the question is whether that would be the “time out”. The result is chronic instability.
The creation of the euro is the second worst monetary idea of its members. Its decay is the worst. Yet that is what could cause Forcing Greece to exit the eurozone. The right way is to recognize that there is an argument for debt relief, subject to the achievement of verifiable reforms. Politicians reject the idea. Statesmen’s take advantage. Soon we will know which group belongs everyone.
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