Despite dozens of summits, the European economic crisis continues to drag on. Greece remains the crux of the matter. Mired in both an economic depression and a political crisis, progress on reform has been difficult. Social unrest and uncertain prospects of future growth has undermined commitment to economic adjustment, raising concerns over how much longer Greece can even remain in the Eurozone.
It has been difficult for others to agree on how best to help Greece because there are political divisions here as well. These were underscored last week in a public spat between IMF Managing Director Christine Lagarde and Chair of the Eurozone Finance Minsters Jean-Claude Juncker. They debated whether the end goal for Greece should be to reduce its level of debt to 120% of GDP by 2020 or 2022. The potential for this disagreement was present from the beginning. The Eurozone’s contribution to the Greek bailout was 2/3 of the total, with the IMF supplying the rest. The Lagarde/Juncker debate, then, resembles two restaurant goers arguing over the size of the check.
In a sense, debating what Greece’s debt ratio should be almost a decade from now is trivial. Greece needs the next tranche of aid now, and the dangers of inaction are indeed real. The deepening divisions within the troika (comprised of the IMF, the EU, and the European Central Bank) have given rise to a range of different proposals. Christopher T. Mahoney offered one such solution last week, arguing that the imperatives of the crisis necessitate kicking the IMF out of the troika and preparing for an orderly departure from the Euro (known as a “Grexit”). I’d offer two comments on the first part of Mahoney’s proposal, and conclude with an observation on the second part.
It’s not apparent that an all-European solution would address the crisis more efficiently. Greece’s economy continues to shrink and its unemployment is now over 25%. In this setting, raising additional tax revenue is difficult and it is also hard to get support to cut government spending further. It is no wonder that there is increasing pressure for some sort of debt relief, but Eurozone countries have little interest in granting this. This official debt relief would follow on the heels of private debt restructuring concluded earlier this year, making it appear that these countries are throwing money away. Eurozone politicians such as Angela Merkel that face elections next year have no desire to give their opponents a ready-made campaign issue. Since the economy across the Eurozone is in poor shape, the needs of voters at home will take priority over the needs of Greek citizens.