Sunday, June 14, 2015

Greece: A Credible Deal Will Require Difficult Decisions By All Sides

by Olivier Blanchard


June 14, 2015

The status of negotiations between Greece and its official creditors – the European Commission, the ECB and the IMF – dominated headlines last week. At the core of the negotiations is a simple question: How much of an adjustment has to be made by Greece, how much has to be made by its official creditors?

In the program agreed in 2012 by Greece with its European partners, the answer was: Greece was to generate enough of a primary surplus to limit its indebtedness. It also agreed to a number of reforms which should lead to higher growth. In consideration, and subject to Greek implementation of the program, European creditors were to provide the needed financing, and provide debt relief if debt exceeded 120% by the end of the decade.

The primary surplus in the program was to be 3% in 2015, and 4.5% next year. Economic and political developments have made this an unattainable goal, and the target clearly must be decreased. It also included a number of reforms aimed at increasing medium term growth, and making the fiscal adjustment easier. These also need to be reconsidered.

In this context, by how much should the primary surplus target be reduced? A lower target leads to a less painful fiscal and economic adjustment for Greece. But it also leads to a need for more external official financing, and a commitment to more debt relief on the part of the European creditor countries. Just as there is a limit to what Greece can do, there is a limit to how much financing and debt relief official creditors are willing and realistically able to provide given that they have their own taxpayers to consider.


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