End “Extend and Pretend” With Greece

LONDON – Greece needs an agreement now with its creditors (the so-called troika comprising the International Monetary Fund, the European Commission, and the European Central Bank). Yet all parties are pursuing a disastrous “extend-and-pretend” strategy with a narrow focus on fiscal issues and pensions. In fact, rumors are now emerging that the Greek administration and the troika are considering yet another extension of an agreement that was supposed to end last year.

At the core of the Greek crisis are structural problems: a dysfunctional public administration, oligopolistic product markets, ludicrous regulatory burdens, bureaucratic red tape, and an absurdly slow judicial system. Without a clear strategy to address them, any agreement will lack credibility.

But if this is true – and many seem to believe it is – the current strategy is bound to fail for two reasons. First, any comprehensive package of structural reforms can be implemented only if austerity is relaxed. Second, an extension would prolong the sense of uncertainty that has so far jeopardized Greece’s recovery.

A credible commitment by Greece to sound macroeconomic policies requires adjusting the troika’s targets to reflect realities. Current negotiations seem to envisage a modest primary budget surplus of 0.8-1% of GDP for 2015. But the best feasible target would be a tiny symbolic surplus for the primary balance (which excludes interest payments on debt) this year, and a gradual increase thereafter to a realistic 1.5-2% of GDP.