Tuesday, February 3, 2015

Greece Advances a Good Idea: Indexing Its Debt Repayments to Economic Growth

by Paolo Mauro

Peterson Institute for International Economics

February 2, 2015

In renegotiating its aid package with the newly elected government of Greece, European governments and institutions should stand firm on demanding fiscal sustainability and reforms. But that does not mean they should reject good ideas put forward by Athens.

An idea worth embracing is that debt repayments to eurozone creditor governments should be indexed to the performance of the Greek economy. If Greece grows fast, it should pay more; if Greece continues to stagnate, it should pay less. This makes good economic sense: European creditors would share in the risk according to an agreed formula, rather than facing periodic crises in the event of stagnant growth and excessive debt-to-GDP ratios. To be consistent with the notion of risk-sharing among euro area members, repayments by Greece to eurozone creditor governments could be indexed to the economic growth differential between Greece and the eurozone.

But for the scheme to work, Greece has to earn the trust of European taxpayers by guaranteeing the quality of its economic statistics and the independence of its statistical agency from political interference.


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