New York Times
November 30, 2012
The new Greek bailout deal agreed to Tuesday by euro zone finance ministers and the International Monetary Fund is a clear improvement over earlier deals. It recognizes that Greece’s current and projected ratios of debt to output are unsustainable. It prescribes useful steps to lower that ratio, including lower interest rates on loans from Greece’s European partners, longer bond maturities and a plan for Athens to buy back and retire some of its heavily discounted bonds.
Regrettably, it excludes more effective tools, like actual debt write-downs, which Germany’s chancellor, Angela Merkel, finds politically unpalatable. And in deference to Ms. Merkel, the deal postpones some of the promised relief until after German elections next September.
But its biggest mistake is conditioning relief on maintaining fiscal austerity. Greece’s only hope for long-term solvency is through aggressive measures to revive economic growth. These could include public investment in modernizing ports and infrastructure, tax cuts to encourage export industries, and better public education. Done right, such measures would more than pay for themselves by improving Greece’s competitiveness in global and European markets. The bailout deal should keep Greece financially solvent for the next few months, but the price could prove too much for Greece’s economy and society to bear. Beginning in 2016, Greece will be committed to extracting a budgetary surplus (excluding interest payments) from a shrinking economy. And it is expected to reduce debt-to-output ratios while output continues to fall.