The Guardian: Greece and the eurozone: Accept reality – and default

Editorial

Instead of postponing the inevitable Greek default, it would be far smarter to prepare for it.

Seen from Brussels, Berlin or Frankfurt, the crisis playing out in Athens this month looks almost simple, and linear in its direction. The Greek prime minister, George Papandreou, wins a confidence vote, as he did on Tuesday night. The government gets MPs to approve its package of austerity measures, set for a vote next week. Then comes the next slug of cash from the IMF and the eurozone, plus the agreement of another massive loan, worth tens of billions of euros. This isn’t easy, European policymakers admit: it requires adept political management, courage, and the ability to stay the course. But the alternatives don’t bear thinking about: the first-ever default by a sovereign member of the European single currency, the possible toppling of the Greek banking system and other institutions around the world in a repeat of the panic that followed the collapse of Lehman Brothers in 2008 – and an existential threat to the entire European project.

Right on the risks, but wrong on the policy prescription. After a month of mass demonstrations in Greece, and the near-dissolution of the government last week, this takes too little account of reality, either domestic and political or international and economic. Not only has Mr Papandreou to get parliamentary approval for €28bn of spending cuts, tax increases and privatisations, he must begin implementing this draconian programme by 3 July, in time for the next extraordinary meeting of eurozone ministers. Even in ordinary times this would be regarded as ambitious, but to do so amid the worst recession the country has seen in four decades would require a miracle of collective discipline. The new finance minister, Evangelos Venizelos, has already tried to change the plan to answer a key grievance of protesters, by dropping an increase in fuel tax and a property tax, and trying to increase Greece’s notoriously leaky tax take by targeting the self-employed.

But these are small compensations to a Greek teacher who has seen her salary cut by 25%, an employee of the Piraeus port authority who suspects his company is about to be sold to the Chinese amid thousands of job losses, or a freshly minted graduate who knows they will struggle to get any kind of job. An abrupt and drastic drop in living standards has been imposed on the Greek people – ultimately to keep afloat banks across Europe that have lent recklessly. The vehement message that has come from the Greek people over the past month is that they will not stand for it – and nor should they. What in José Manuel Barroso’s words is good news for the EU is terrible news for those who have to live with the consequences.

Greece’s main opposition leader, Antonis Samaras, for one, is no longer buying it. His economic logic is impeccable: the imposed cuts are squeezing demand at a time when the economy is in deep recession. Indeed, it is already happening: 50,000 businesses went bankrupt last year and the economy is in its third straight year of recession. The fact that the main conservative opposition points this out, however, is a big new twist.

Economically, socially and now politically, the status quo is unsustainable. Instead of postponing the inevitable Greek default, it would be far smarter to prepare for it. Eurozone policymakers need to recapitalise Greek and other eurozone banks with major Greek exposure in return for equity stakes. They also need to reaffirm their commitment to stand behind European interbank lending, and to keep pumping money into the system. There should follow an ordered default on Greek sovereign and commercial debt, including an audit of the outstanding obligations to see if some of the debt is odious and should not be repaid at all. And there must be a sharp relaxation of the austerity plans. Let us not kid ourselves that this will be easy – but at least it will not be as impossible as achieving the kind of suicidal austerity that Greece is being forced to follow.

Source: http://www.guardian.co.uk/commentisfree/2011/jun/23/greece-eurozone-reality-default