BRUSSELS – Since the anti-austerity Syriza party's victory in Greece's recent general election, the “Greek problem" is again preoccupying markets and policymakers throughout Europe. Some fear a return to the uncertainty of 2012, when many thought that a Greek default and exit from the eurozone were imminent. Then as now, many worry that a Greek debt crisis could destabilize – and perhaps even bring down – Europe's monetary union. But this time really is different.
One critical difference lies in economic fundamentals. Over the last two years, the eurozone's other peripheral countries have proven their capacity for adjustment, by reducing their fiscal deficits, expanding exports, and moving to current-account surpluses, thereby negating the need for financing. Indeed, Greece is the only one that has consistently dragged its feet on reforms and sustained abysmal export performance.
Providing an additional shield to the peripheral countries is the European Central Bank's plan to begin purchasing sovereign bonds. Though the German government does not officially support quantitative easing, it should be grateful to the ECB for calming financial markets. Now Germany can take a tough stance on the new Greek government's demands for a large-scale debt write-off and an end to austerity, without fearing the kind of financial-market turbulence that in 2012 left the eurozone with little choice but to bail out Greece.
In fact, both of the Greek government's demands are based on a misunderstanding. For starters, Syriza and others argue that Greece's public debt, at a massive 170% of GDP, is unsustainable and must be cut. Given that the country's official debt constitutes the bulk of its overall public debt, the government wants it reduced.