Sunday, June 14, 2015

Greece has nothing to lose by saying no to creditors

by Wolfgang Münchau

Financial Times

June 14, 2015

So here we are. Alexis Tsipras has been told to take it or leave it. What should he do?

The Greek prime minister does not face elections until January 2019. Any course of action he decides on now would have to bear fruit in three years or less.

First, contrast the two extreme scenarios: accept the creditors’ final offer or leave the eurozone. By accepting the offer, he would have to agree to a fiscal adjustment of 1.7 per cent of gross domestic product within six months.

My colleague Martin Sandbu calculated how an adjustment of such scale would affect the Greek growth rate. I have now extended that calculation to incorporate the entire four-year fiscal adjustment programme, as demanded by the creditors. Based on the same assumptions he makes about how fiscal policy and GDP interact, a two-way process, I come to a figure of a cumulative hit on the level of GDP of 12.6 per cent over four years. The Greek debt-to-GDP ratio would start approaching 200 per cent. My conclusion is that the acceptance of the troika’s programme would constitute a dual suicide — for the Greek economy, and for the political career of the Greek prime minister.


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