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Time for Debt Reduction in Greece

El-Arian, Mohamed A., (2016), “Time for Debt Reduction in Greece”, Project Syndicate, 22 April

Once again, Greece is at an inflection point. With its cash balances severely stressed, it seems unlikely to be able to pay the cascading debt payments that are falling due over the next few months. So yet another round of contentious and protracted discussions with its creditors is underway – one that may well produce yet another short-term solution. Yet kicking the can down the road is hardly the negotiators’ only option. Indeed, it is the wrong approach.That, in a nutshell, is the story of Greece. By avoiding decisive action to address the debt overhang, the country and its creditors have contributed to a situation that is disappointing for everyone. Greece’s European partners have nothing substantive to show for the billions of euros they have lent the country. The International Monetary Fund and the European Central Bank, which have gone along with the extend-and-pretend approach, have placed their credibility at risk. But the biggest losers have been Greek citizens, who suffered through one of history’s most severe austerity programs but still cannot see light at the end of the tunnel. Indeed, Greece’s debt-to-GDP ratio today is considerably higher than it was when its austerity efforts began. And youth and long-term unemployment have remained at extremely high levels for an alarmingly long time. Greece’s dismal growth performance over the last eight years contrasts sharply with the performance of the other eurozone members that faced crippling payment pressures. Not having fallen as hard as Greece, Ireland and Portugal have bounced back to positive growth. Even Cyprus has performed better, avoiding economic collapse and recapturing growth in the last two years, whereas Greece relapsed into recession.

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