Friday, November 2, 2012

The self-defeating Greek rescue policy

Financial Times
November 2, 2012

Greece’s imminent showdown over its 2013 budget will further drain what little hope is left for the country. Following a summer in which Europe turned marginally more optimistic about seeing the country through the crisis without it leaving the euro, the new budget projects that the ever-deepening economic collapse is undoing the good done by a debt restructuring earlier this year. An estimated debt burden as large as it was then lays bare the unforced damage wrought by policy errors.

The latest projection is for debt to reach 189 per cent of economic output next year, more than a pessimistic forecast from March. This is almost wholly because the economy has shrunk. A big cause was the choice to prioritise deficit cuts over equally necessary structural reforms. With more time to cut the deficit but stronger pressure for reform, space could have been created to boost Greece’s productivity and its ability to service its debt. In another error, the restructuring of private sector creditors was left too late and done too pusillanimously. This wasted opportunity hurt Greek prospects and landed Europe’s taxpayers with more risk.

Draconian deficit cuts and a bailout of private creditors are not solely to blame for Greece’s collapse. The uncertainty created by the politics of the rescue matters as much as the policies adopted. With the government repeatedly up against a wall when the enforcing troika assesses its compliance, nothing can be planned for more than a few months at a time. This keeps the economy in an endless twilight zone. The worst damage is to a banking sector still waiting to be recapitalised, adding a harmful credit crunch to policy uncertainty and depressed demand.


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