Better a Greek haircut that a Greek tragedy
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28 October 2011Anshuman Jaswal
The crisis in Greece has been averted for now. The European governments have been able to reach a consensus, banks have understood the need to sustain losses on the Greek sovereign debt in their books and the markets are happy the uncertainty has been reduced. Nicolas Sarkozy has been able to come out in a positive light and now thinks that admitting Greece to the Eurozone was a mistake. Germany has apparently won a 'pyrrhic' victory. But if we look at the last couple of years, all of this seems more like the beginning of a difficult journey than the end. We have been assured before that Greece will take care of its problems and can only hope that it does so now. There are two points pertaining to this discussion that I would like to raise now. The first is regarding the precedent that this decision would set for the crisis to come. There are a number of other economies in Europe that would require similar assistance, albeit not to the same degree. Are we comfortable with the idea of extending the same decision to other economies as well? Does the European and the global economy have the wherewithal to take such steps every few months? How long can we continue to use such solutions without jeopardizing the economic health of the countries that have not been as profligate with their finances and were prudent in their outlook to growth and development? We also have to consider the capabilities of the European banks to sustain such measures in the next 2-3 years. The crisis has been averted for now, but we need to ensure that the measures such as the use of the European Financial Stability Facility (EFSF) or its long-term counterpart, the European Stability Mechanism (ESM) are robust and sustainable. The second is regarding the impact of the restructuring on the Greek economy and the people. The belt-tightening is required and has already been happening for some time. But one wonders how an economy that is so highly dependent on its government spending, and is undergoing such severe austerity measures, would be able to transform itself. Besides economic reform, there is a need to turn the whole administrative and bureaucratic machinery around. There has to be an effort at a European level to ensure that the recent measures and fiscal austerity do not debilitate the Greek economy to the point it cannot recover. This is not a new point but still needs to be reiterated. Finally, blaming the Germans or anyone else for their current situation would be a defensive and self-defeating action. Greece needs to start acting on these issues now, the blame game can be played later.