Will the New Austerity Plan for Greece Work?

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Monday, 03 May 2010 12:56

CEPR co-Director Mark Weisbrot responds to questions from a Greek journalist about the agreement reached Sunday for a 100 billion euro loan package, between the Greek government and the European Commission, the European Central Bank, and the IMF:

1. Are these measures [the Sunday loan agreement] good to resolve the problem?

I would say no. Note that the finance ministry just lowered their projections for Greece's GDP growth: from negative 2 to negative 4 percent for 2010. They may well be lowered again soon, if the policies are implemented. In Latvia, the IMF projected negative five percent growth for 2009 and it came in at negative 18 percent.Also, they are projecting a debt of 149 percent of GDP by 2013 under this program. Unless most of this debt can be rolled over at extremely low interest rates, which nobody is talking about, this is not sustainable, and simply pushes the inevitable restructuring a few years into the future, after the debt burden becomes larger as the economy shrinks further.

2. If they are not, is there any other option now?

Well there are a lot of options but they all involve taking a harder line with the EC/IMF/ECB and refusing to accept the proposed conditions. If they were willing to make the loan at near-zero-interest rates and drop the pro-cyclical conditions, then a sustainable deal might be possible. Other options include a forced restructuring of the debt and/or leaving the Euro. These would also involve costs to the Greek economy, but they may well be smaller, and shorter-lived, than those of the open-ended recession and potential long-term stagnation that the current arrangement commits the government to.