Codogno, L. & De Grauwe, P. (2015) “Both Greece and its creditors must compromise to prevent the risk of a Grexit“, LSE EUROPP, 26 March.
Greece and its creditors have been engaged in a two-month standoff over the release of further financial assistance to the country. Lorenzo Codogno and Paul De Grauwe write that with no agreement yet reached, the possibility of Greece leaving the euro has now become real. They argue that the only solution to the crisis is for both sides to compromise, with the Greek government accepting deep supply-side reforms, and Eurozone policymakers offering Greece a fair deal on the demand-side.
The Greek crisis has reached a new climax. The probability of a Greek exit from the Eurozone has now become real. Yet, after the Greek elections it appeared that people with common sense could come to an agreement. There was a new Greek government that wanted to get rid of corruption. In particular, in contrast with the previous Greek governments, it was eager to reform the tax system so that the rich Greeks would pay taxes. There was also a growing recognition within international institutions, such as the IMF and the European Commission, that the intensity of the austerity programmes imposed on Greece had gone too far and had pushed the Greek economy into a deep economic depression with unacceptable levels of unemployment rates.
A deal between the new Greek government with the creditor countries seemed possible. Such a deal could have been based on two pillars. Measures taken by the new Greek government to reform the tax system and a relaxation of the intense austerity programme. But such a deal proved particularly difficult because both sides around the negotiating table showed a disturbing lack of common sense and an unwillingness to arrive at a compromise.
Yet a compromise is necessary and possible. It should be based on the long-term benefits for the overall Eurozone and not just short-term fixings or kicking-the-can-down-the-road. Moreover, benefits should be weighted carefully against potential risks. In particular, the risks implied by the Grexit option appear significantly underestimated these days. Outright Monetary Transactions and Quantitative Easing by the European Central Bank provide a much welcome backstop, but may also introduce complacency and a false sense of security over any possible contagion.
Relevant posts:
- Gros, Daniel, (2015), “Grexit 2015: A primer”, CEPS Commentaries, 23 January.
- Darvas, Z. & Hüttl, P. (2015) “Why a Grexit is more costly for Germany than a default inside the euro area – Contrary to the IFO institute, we conclude that German losses on both official and private claims would be much higher if Greece exits the euro“, Bruegel Institute, 16 January.
- Wolff, Β. G. (2015) “Why Grexit would not help Greece – debunking the myth of exports“, Bruegel Institute, 06 January.