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Greek choices after the elections – there is a chance for an agreement between the new Greek government and euro-area partners with both sides claiming victory at home

Darvas, Z. (2015) “Greek choices after the elections – there is a chance for an agreement between the new Greek government and euro-area partners with both sides claiming victory at home“, Bruegel Institute, 23 January.

 

In the days ahead of the Greek snap elections on 25 January 2015 a huge range of opinions has appeared on what Greece and its lenders should do. A large group of people are saying that Greek public debt is unsustainable and a significant part of it should be written off. In their view, the Troika is responsible for the deep crisis, austerity has failed, and the fiscal space gained from the debt write-off should be used to stimulate growth.

Another group says that irresponsible pre-crisis Greek policies, as well as the extremely large, 15% of GDP budget deficit in 2009, necessitated the bail-out in 2010. Implementation of the bail-out conditionality was incomplete and the Geek public sector is so inefficient and so much depends on cronyism that it is not surprising that the Greek crisis became so deep.

As always, both sides have some truths but none of these explanations is complete. One could write a lot on what happened, who is responsible for desperate social hardship and what should have been done differently. But after the elections, both Greece’s new leaders and euro-area partners should look ahead: given the status quo, what are the real choices?

Fig1Bruegel

Exit is not an option. Greece would enter another deep recession, which would push unemployment up further and reduce budget revenues, requiring another round of harsh fiscal consolidation: exactly what opposition parties want to avoid. (This effect is forgotten by those who argue that since Greece has a primary budget surplus, it has now the option to default and exit.) Euro-area creditors would lose a lot on their Greek claims and private claims on Greece would also suffer (see our earlier post here). Moreover, exit would also risk the stopping of EU-budget related inflows to Greece (cohesion and structural funds, agricultural subsidies): in 2013 Greece received a net payment of 2.9 % of GDP from the EU budget. This was a transfer (not a loan) and the country would receive similar transfers in the future too.

Debt write-down is extremely unlikely – and unnecessary as well. Any level of debt is sustainable if it has a very low interest rate. Japan is a prime example: gross public debt is almost 250 % of GDP, while the average interest rate is 0.9 percent per year. Despite the very high Japanese public debt, there is no talk about its restructuring.

Fig2Bruegel

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