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To Grexit or not to Grexit

b2ap3_thumbnail_grexit.pngSunday Greece holds a referendum. Formally it’s yes or no against the last proposal of the Euro group and IMF – but in essence the result will be deciding if a Grexit is still avoidable. But if it is – what has to happen to avoid it?

One part is obvious: Greece has to commit to reforms so that is will have a sustainable budget over time. Not just cutting expenses, selling companies or increasing taxes – reforming the government, labor market, healthcare and welfare spending. Reforming as well the whole system to decrease the level of clientelism, nepotism, corruption and tax evasion. A second part is at least a broad backing: invest into growth. That will need help from Europe. Those two together bring also the worlds of most creditors (austerity measures) and Greece (Keynes) together – and can make the deal more acceptable to both parties. But there is a third part needed: debt relief. This is the hardest part for the creditors. It’s not only a hard sell at home – but also towards the countries that implemented austerity measures themselves when confronted with unsustainable spending. Yes, the current situation in Greece is largely home-made. But it is time that Europe admits that everybody knew already when Greece joined the EU and later the Euro zone that this was a geo-political decision and that this will have a price. And the European government have made the situation worse by not forcing Greece to act earlier on its unsustainable finances.

GrexitIs it achievable? An important factor is the vote on Sunday. If it will be a clear no the Greek government will be less likely to agree to sustainable reforms. But without that a deal makes no sense. Yes, debt forgiveness makes sense – but only if in return the budget will be made sustainable. So far Syriza has done the opposite: increasing spending on the oversized government and undoing sensible reforms only led to increased capital needs. And its politics so far reversed the recovery and brought Greece back towards recession. As long as this does not change forgiving debt is useless as the same situation will occur again in a couple of years. Furthermore any action like that would need also democratic backing in the other countries, what is tough already – and impossible without any reforms in Greece. If it will be a yes or a close vote this will can help to bring Syriza to reason. Helpful would also be if Varoufakis would resign in that case. His ideological and demagogic fight has only helped to make things worse and to make any deal more difficult. Insulting your negotiation partners was never a good tactic – and is even worse if you want them to agree to a debt relief.

A deal would need Greece to come up with reforms to make its budget sustainable on the long run. Not simple cuts or tax increases – reforms in government spending that have a long term impact. But a deal would also need that the creditors finally openly acknowledge that there will be a debt relief at some point in the future. A debt relief need conditions to be effective. That is logical – but has even been shown in research (see e.g. the recent edition of the Economist). So a debt relief should be agreed upon now but should come only into effect after certain conditions have been met. Such an acknowledgement will help the Greek government to sell the pain of the reforms and will make it more acceptable – and serves as the literal light at the end of the tunnel. Furthermore an investment program for future growth should be agreed upon – ideally not limited to Greece but extended also to other countries in debt programs or with a living standard lagging far behind European average. That will be good for Europe – and can help countries as Portugal, Ireland and Slovakia to accept the debt relief.

So let’s hope for a yes on Sunday – and for a turn-around of both sides: the Greek government has to accept reforms and the European debtors have to finally sell a Greek debt relief at home. At the end we will have a stronger Europe and a more sustainable Greece – a win-win.


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