FEPS Fresh Thinking

The debate on Greece and how a solution can be found is causing more and more problems.

The public opinion in Northern Europe is influenced by the “pacta sunt servanda” approach, meaning Greece has to fulfil all commitments so far signed. In Southern Europe – especially in Portugal, but also in Spain – it is the “envy argument” brought forward in order not to give favour to Greece, which was not accorded to them. In Greece itself it is even more problematic. There is the “revenge argument” coming up. The Germans are imposing us now through reforms but they have still to suffer from their crimes committed during World War II. None of this is very helpful, neither for Greece nor for Europe.

Behind all this is the wrong approach on how to deal with the sovereign debt in Greece. Behind all this is how huge and urgent a problem it is for the Greek banks, especially after the ECB announcement that it would no longer accept Greek bonds as a guarantee. It is quite obvious and argued by many critical economists for a long time now that cutting the budget expenditure and coupling this with so called structural reforms (with the argument that the light in the tunnel will come in five or six years) brings this kind a dangerous situation which we are facing now. Greece is facing an even more serious shrinkage of the GDP, and in consequence much less fiscal revenue, which leads to the opposite of that what the austerity measures are supposed to realise: a huge increase in debt!

But it should also be clear that Greece is and was the most vulnerable of the Eurozone members. The country is the least effectively governed. It is not by accident that tax is not collected properly; those with large fortunes, including the Greek Orthodox Church, are evading tax payments; public investment is not admitted to the normal rules of serious competitiveness etc. These problems have nothing to do with Europe and the Euro. The newly elected prime minister Alexis Tsipras should avoid blaming and shaming Germany. A huge responsibility of the current situation is simply due to the interior Greek problems.

Nevertheless a solution is needed. Proposals are on the table and one of the most appropriate ones could be GDP indexed bonds as put forward by internationally renown economists as Joseph Stiglitz, Stephany Griffith Jones and Robert Shiller recently in the FT. Such bonds link interest payments to the growth rate of the Greek economy. This would NOT reduce the total value of the overall debt, so such bonds do not mean debt reduction. The GDP-bonds could allow Greece to have additional fiscal space for necessary spending in education, health care but also in public investment to create the needed growth for a new start of the Greek economy. For sure such a solution is controversial. But as even the The Economist of February 7th 2015 is writing, such a smart debt mechanism with the proposal to switch existing Greek debt for GDP-indexed bonds is promising. It is an already old idea whose time may at last have come! (The Economist, February 7th-13th, 2015, p. 64)

Even when the blue in the sky is far ahead now, cloudy weather could become at least in the mid-term a bit sunnier.

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