November 28, 2012
The next tranche of bailout money for Greece has been approved to prevent Greece’s immediate insolvency, and the Greek government is imposing fiscal austerity as it sticks to its end of the bargain to qualify for the cash handouts.
The package is a kick of the can as this lightening of Greece's debt-load will not produce economic growth on cue. Austerity measures – a condition of the deal - still seem likely to extend recession. Greece's budget reduction promises can’t be met without economic growth.
Alan Kohler spells it out. Greece's economy is expected to shrink:
...by 4.5 per cent next year. In order not to default and to stay in the euro, Greece needs a dramatic turnaround in economic growth. But that is impossible because it is caught in an austerity loop where a fiscal multiplier larger than one is amplifying the impact on the economy of budget cutbacks.
Greece’s social economy is sinking deeper and deeper under the austerity measures that are the condition for maintaining any hope for more tranches of these EU loans.
Why cannot some fraction of the officially held debt be set aside to be written off gradually over the next five years or so conditional on Greece achieving a set of milestones concerning institutional and market reforms? This would help to stimulate growth by making it easier to implement key structural reforms and by reducing the large uncertainty hovering over the economy.
Costas Meghir, Dimitri Vayanos and Nikos Vettas, (members of the Greek Economists for Reform group) say in their Reform and Restructuring article that:
Greece’s public debt reached 142% of GDP in 2010 and is projected to rise to 160% in 2012. This is because the government is still running a deficit and because GDP is shrinking. Insisting that the debt is repaid in full can drive the Greek economy into a prolonged recession and ultimately into bankruptcy.
They propose to debt forgiveness being tied to concrete and measurable reforms with a system of guarantees. The reforms they have in mind are:
The necessary reforms include not only a further reduction in public expenditure (although cutting waste is necessary) and increase in tax revenue (although tackling tax evasion is also necessary)...We need truly open markets for goods and services, and competition. An efficient justice system, and institutions that are strong and independent of the political parties. Flexible labour markets, with insurance and training for the unemployed. A funded pension system that allows free choice by savers. An educational system with independent units that compete and are evaluated based on academic excellence, so that there is access to high‐quality education for all children and youngsters. A radical redesign of the health system. A small public sector where performance is evaluated and jobs may not be permanent.
They say it is time fro Greece to shift the debate away from the short‐run management of the debt to how its citizens would like their country to look in a decade’s time.