In the Greek crisis, debt is the lesser problem

Yannis Ioannides in two lectures, one given to Tufts University Alumni in Athens, September 28, 2011 (in Greek) with the title “In the Greek Crisis, The Debt is the Lesser Problem,”  and the second as part of a conference organized by the Karamanlis Chair in Hellenic and South Eastern European Studies at the Fletcher School of Law and Diplomacy, Tufts University, Medford, Massachusetts, October 21, 2011, with the title ``Greece, The Eurozone and the Debt Crisis,” reviews the origins and nature of the Greek crisis. While the  loss of competitiveness that the country has experienced ever since accession to the monetary union is a central force in its current condition, there have been other also troublesome developments, such as slowdown in productivity growth, overconsumption, the lack of productive investments, a continuing tendency for the public sector to assume the debt of insolvent public corporations and inability of the country to modernize while experiencing increasing inequality and corruption. However, there are also issues with the design of the Eurozone itself, which are contributing to Greece’s having become a particularly vulnerable member of the Eurozone. The Greek experience is discerned in the experiences of other Eurozone countries.

Whereas private banks and investors can be persuaded to accept “haircuts”, as the international experience has shown repeatedly, and thus it would be possible to relieve some of Greece’s crushing debt burden, debt held by the official sector (other Eurozone countries, the European Central Bank, and the International Monetary Fund) may not be so easy to write down. The latter has been increasing as a share of Greece’s debt as a result of the assistance program by the Troika.

At the present juncture, one must recall instances in world history where superpowers wrote down or altogether forgave the debt of other countries, even when as in the case of Germany those countries were universally considered the guilty parties, for having been responsible for destructive world wars. The treatment of “vanquished” Germany after World War I has been widely recognized as a mistake, and following World War II, the United States and its World War II allies forgave most of Germany’s debt. The US itself forgave German debt from World War I.

The lectures pose the question that the Greek crisis presents another such challenge. The burden of the Greek debt is really crushing. Greece must undertake major, deep, and long-overdue structural economic and political reforms. Incentives must be so designed and appropriate expert and authoritative supervision provided to Greece, while Greece is at the same time given the benefit of some official debt relief, too. A carefully designed package of incentives and reforms must be addressed formally by economists and international affairs experts.

About Y_Ioannides

Tufts University

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