The real solution to the Greek crisis

By Nicholas Economides

Nicholas Economides

Greece has lost a lot from the economic crisis. The most important loss is the loss of trust of Greeks and Europeans to the Greek government.

The Third Memorandum was signed under the worst conditions for Greece. After the disastrous Varoufakis “negotiation” with the EU, the mortal-risk acrobatics of the referendum, under capital controls, with Greece almost over the brink to the total catastrophe of Grexit, the Tsipras government agreed to most harsh terms. These included very large primary surpluses over 3.5% of GDP draining the economy of cash, reductions in pensions, transfer of public property to the creditors for 99 years, and many other measures that had earlier prompted the Syriza, ANEL, Golden Dawn and other antimemorandum forces to riot violently and curse the Parliament.

The second evaluation of the Third Memorandum proved to be a disaster for the Greek government goals. The government demanded immediate restructuring of the debt, but instead received a vague postponement and a new discussion in 2018. Greece thought it could benefit from the IMF-EU dispute on whether the Greek debt is sustainable. The IMF forecasted slower growth and therefore proposed a lower surplus and immediate restructuring of the debt. The Syriza government, based on an ideology that prevented it from supporting the IMF, backed the EU which imposed a larger surplus and postponed the debt discussion for 2018.

On the issue of the ECB quantitative easing (QE), Greece did not fare better. Without immediate debt restructuring, the ECB does not see the Greek debt as sustainable, and will not include Greece in QE. Nor will the ECB “support” issuing new Greek bonds, without prior assurance of debt sustainability. Thus, the third government narrative that it would issue new bonds like PM Samaras did in 2014 falls apart. The remaining government narrative is the theory of the “compressed spring” that “because Greece had so many years of recession, it will automatically get to growth.” This is an obviously utopian theory, far from economic reality. The bottom line is that multi-month postponement of the evaluation resulted in additional uncertainty, lack of trust of Greece by the EU and the financial markets, and postponement of Greece’s exit from the crisis. 

Originally published in Greek by Kathimerini. Read the full English translation here

Nicholas Economides is a Professor of Economics at NYU Stern School of Business.