Germany must treat Greece with affection

Finance Minister of Greece together with his counterparts from 16 other eurozone nations as well as the Managing Director of the International Monetary Fund Christine Legarde agreed to provide Greece with an additional 170 billion dollars (euros 130 billion) with the objective of staving off default that would have threatened the viability of euro. This agreement post dates by a few hours negotiators' success in successfully persuading private bond holders to take a greater loss, Athens agreement to request banks and investment funds to forgive about 107 billion euros in debt and the commitment by European Central Bank and other national central banks in eurozone countries to forego profits on their holdings. Athens as part of the deal has agreed to continue to undertake politically challenging reform measures; for example, cessation of several public sector programmes for the disadvantaged, lay-off of public sector workers, cutting wages/pensions as well as higher revenue generating proposals that have already caused violent street protests. The contributors to the bailout package hope that the package as well as the austerity measures would be sufficient for the Greek government to reduce its current 160 percent debt to Gross Domestic Product (GDP) to 120.5 percent by 2020 and the economy's survival secured without any further external support. Whatever the reservations of the IMF and the 16 eurozone countries, the fact remains that external support is the relatively easier part of the agreement to deliver with three critical questions that would have to be dealt with by the unelected Greek government and those it purports to speak for: whether the loss of autonomy in economic decision-making would be acceptable? Are the austerity measures doable for the Greek government given the extent of street protests that it is already grappling with? And whether these austerity measures with their obvious documented negative impact on the growth rate would allow Greece to come out of deep recession by 2020? The press release by the Eurogroup notes the difficulties and the pitfalls but insists on the austerity measures and structural reforms: "The Eurogroup is fully aware of the significant efforts already made by the Greek citizens but also underlines that further major efforts by the Greek society are needed to return the economy to a sustainable growth path...We reiterate our commitment to provide adequate support to Greece during the life of the programme and beyond until it has regained market access, provided that Greece fully complies with the requirements and objectives of the adjustment programme." Economic theory maintains that without growth an economy would remain mired in a recession with the obvious outcome being low revenue collections and high unemployment that may well neutralise the extremely painful effort to reduce expenditure on toxic debt. Olivier Blanchard, Economic Councillor and Director of Research Department IMF has put it succinctly, "the levels of debt that we have are due in large part to the crisis and in part to not-the-best behaviour before the crisis...looking forward you should look at how the debt was decreased after World War II. It was a combination of primary surpluses, high growth and low interest rates. I think the ingredient that is potentially missing in this case that will make it harder is the high growth." The insistence by the IMF and the 16 eurozone countries to austerity measures accompanied by structural reforms would, according to Blanchard, 'increase the potential growth rate' which is of the 'essence not only for itself but to get debt under control and to decrease it over time.' The GDP of Greece has already shrunk by 7 percent. Should inflation also drop like a stone there would be enough nominal GDP growth for fiscal numbers to add up. For euro to be protected authority measures, bailouts and debt haircuts in the South - Greece, Portugal, Spain and Italy - alone would not suffice. Adjustments in surplus nations like Germany would be equally essential. Encouraging domestic demand to grow quickly and allowing real exchange rate to rise and tolerating more inflation and investing its current account surplus in factories in southern Europe in accordance with Victor Hugo's European dream would be needed. Copyright Business Recorder, 2012