Is Europe heading back to financial mayhem? Bank of Greece Governor Yannis Stournaras warned this week that it might be. Any further delay in reaching agreement between Greece and its creditors, he said, risked a new recession and a fresh crisis of confidence across the euro zone.
Maybe that’s a little alarmist — but he’s right about one thing. This ridiculous saga has dragged on long enough.
Greece’s current bailout program (its third) was understood to be flawed from the start. It failed to recognize that Greece’s debts were unpayable, and it imposed long-term fiscal demands too severe to allow strong and sustainable growth. It did provide some additional debt relief — but the aim was not to solve the problem once and for all, only to delay the inevitable. Once again, the inevitable is bearing down on Greece and its European Union partners.
The new deadline is July, when more than 7 billion euros of debt repayments fall due. Without further support from creditors, that’s unlikely to be payable. Recently the yield on one of the bonds in question surged to more than 13 percent on fears that another new patch wouldn’t be forthcoming. Most likely, as usual, a deal of sorts will be done — but it’s hard to see whose interests are served by this perpetual cycle of crisis, confusion and short-term fix.
The latest disagreement is unusually complicated because it’s not just between Greece and its creditors. The creditors — EU governments on one side and the International Monetary Fund on the other — have fallen out too.
The IMF has been insisting that Greece’s future budget target should be reduced from a surplus of 3.5 percent of output to a still-demanding 1.5 percent, and that the debt should be written down to a sustainable level. EU governments are against any further debt forgiveness, reckoning that their voters won’t accept it, and want to stick with the tougher (albeit delusional) fiscal commitment. For good measure, Greece is quarreling with the IMF over its insistence on pension reforms, which are especially challenging politically. Perfecting the latest impasse, Germany’s government says that any deal requires IMF participation.
It would have been better, and certainly simpler, if the IMF had never gotten involved. The EU is not a cash-strapped developing country, after all; it has ample resources of its own to deal with the problem. But having insisted on IMF participation as a way of deflecting their own responsibility, EU governments need to accept its analysis.
A gentler fiscal regime combined with sufficient debt relief to make Greece’s finances sustainable will indeed pose a political challenge for some EU governments. But if they fail to rise to this test, Greece will continue to suffer needlessly, and the recurring threat of financial crisis will stand as proof of the EU’s inability to master its own affairs. In the longer term, that hardly advances Europe’s prospects.