Breaking the Eurozone Deadlock
Wednesday’s Eurozone summit brought a new result. Rather than conclude with pictures of handshakes and a statement full of flowery rhetoric; it concluded with no agreement on the Greek debt issue and a promise to reconvene on Monday. The issues at stake are complicated. Greece is in what can only be called a depression, with greater than 25% unemployment and a shrinking economy, and has earned the right to draw on the next tranche of its bailout from the “troika” of the IMF/EU/ECB.
IMF Managing Director Christine Lagarde has been resolute in insisting that Greece needs to have a future of sustainable debt, and so the Fund has insisted that any further support be based on the premise that Greece’s debt level be 120% of GDP by 2020. At the present, it stands at approximately 170%. This is where it gets complicated. Reaching the 120% threshold by 2020 requires more than just accounting tricks. It will require the European governments that have lent to Greece to take losses on their loans. This official debt restructuring, coming on the heels of the private debt restructuring concluded earlier this year, is difficult for politicians to sell to their constituents, and so resistance to this proposal is politically understandable. Thus, the summit ended in the early morning with no real progress.
Resolving this crisis is critical. Not giving a fragile reform-minded government in Greece a needed shot in the arm risks further political turmoil, which in turn leaves open the potential for Greece to leave the Euro. Restoring growth is essential to avoiding a “Grexit,” which will cause real tumults across financial markets, and have spillovers affecting Italy, Portugal, and Spain.
Resolving this crisis requires real leadership. Left to their own devices, the Eurozone member governments will continue to overpromise and underdeliver. It’s a bit paradoxical that the IMF, an organization that’s often viewed as causing more harm than good to member countries, is the one that’s truly looking out for Greece by raising the long-term debt sustainability issue. Lagarde’s staunch rhetoric aside, though, one really has to question how much leverage the IMF actually has. It is not going to abandon Greece by leaving the troika, and these same Eurozone governments that oppose debt relief are also influential IMF members in their own right. If the IMF backs down on the Greek debt, Greece’s growth prospects will be further harmed.
To end this deadlock, it’s necessary for the Obama administration to become more engaged in this process. The imperatives of the presidential campaign led the White House to downplay its role, leaving the crisis management to the Europeans. With the election over and a clear deadlock between the Europeans and the Fund, it’s time for the White House to take a more active stance. A public statement by White House in support of Lagarde and the 120% / 2020 position will help to ensure that the next Eurogroup summit ends in an agreement that helps Greece and moves the Eurozone forward.
We all know that the Europeans won’t appreciate such a statement, but the time for niceties has long past. If the Eurozone members continue on this path of rewarding fiscal austerity with half-hearted measures, this only serves to make a Grexit (and the attendant economic crisis that would result) increasingly likely. Managing the common currency requires substantive commitment on the part of Eurozone countries. If Greece is to remain a member, reestablishing growth is essential. This cannot happen without credible action on Greece’s debt. Publicly supporting Lagarde and the 120% / 2020 position is a sensible contribution that Washington can make to bring the Eurozone crisis to a swift conclusion.