The level of distrust between Greece and its creditors grows increasingly obvious as both sides continue negotiations for a new bailout program.
The International Monetary Fund is requiring more European debt relief for Greece — at a minimum, a longer payback period on its European Union loans. But Germany demands that the fund lend to Greece even if Athens gets no quick additional debt relief. More relief would not be required for “the coming years,” German Finance Minister Wolfgang Schaeuble stated.
However, additional IMF loans would only paper over Greece’s economic issues and postpone the reforms Athens needs to produce to remain in the euro zone. Instead of more loans, the IMF should force Greece and its creditors to come up with long-term compromise solutions.
Given Greece’s poor record in meeting previous loan conditions, the Europeans seek Greek parliamentary approval of additional budget measures, imposed if Athens fails to meet its targets. This course would leave Greece still unstable if, or how, its creditors might ease its debt burden. Such economic brinksmanship would also offer Greece little hope of real solution — which would include restoring private-sector confidence, attracting foreign investment and restarting growth.
It seems that the EU is currently in a lose-lose situation in Greece. If it carries on down the same path it is very likely that Greece will destabilize totally. The government is already crumbling under the weight of populist promises that it could never keep in the first place. The economy is emaciated and some of the best human capital has already deserted the country, for years if not decades. At the same time, Greece is confronting a huge challenge with a large number of refugees. The Greek folks have been amazingly generous and willing to help the refugees, but public institutions are rotted, supplying substandard help to the wave of refugees. Maybe this time around the EU cannot afford the risk of destabilizing Greece. The wave of refugees, the rise of populist parties both from the left and the right in many European countries, the talk about Brexit, the possibility of a collapse of the economy of Saudi Arabia if oil prices continues at such low levels, and the concern over the direction of US politics make a destabilized Greece very risky for the EU.
If it changes path and gives Greece substantial debt relief then it presents a moral hazard problem in the system. It sets a precedent that could lead to political risk contagion. One can envision that sometime in the not so distant future the EU will be dealing again with economies that are in danger. Many European countries are still not competitive. The suggested changes and the tensions over labor relations in France reflect just that. Other countries will at some point find themselves in the place of Greece.
But it is not just the EU that is currently in a lose-lose situation. It is the Greek folks too. If the EU continues down the same path, they are not likely to experience an increase in their quality of living for many years to come. And if it changes path, they will probably keep on being governed by the same corrupt and nepotistic forces that resist any type of meritocracy in the country.
The only way to find a win-win here is through a complete overhaul of the existing Greek government or a newly elected one. A government that would be a trustworthy partner in the EU, that it would believe in and apply badly needed reforms in the functioning of the courts and the enforcement of property rights, that it will devote to a stable tax system and to lowering taxes over time, and a relentless aim on transparency and accountability in the public sector.
Conceivably a good starting point would be to learn from the experience of Italy and the leadership of Matteo Renzi, who is applying a series of reforms that could modernize the Italian economy
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