The Logic and Fairness of Greece’s Program

Those who thought there is no logic and fairness, here is Oliver Blanchard trying to make a case for the same.

IMF recently gave an umpteenth fund/bailout to Greece.

Blanchard says the only way out was debt restructuring:

Some countries have been able to work down heavy public debt burdens. Those that were successful did it through sustained high growth. But in Greece’s case, it had become clear that high growth—let alone sustained high growth—was not going to come soon enough. Debt had to be restructured.

The process was long and messy. After all, bargaining between creditors and debtors is rarely a love affair. In the process, foreign creditors were often vilified in Greece as bad guys—rich banks, who could and should be willing to take a hit. But in the end, banks belong to people, many of them saving for retirement, who saw the value of their bank shares go down in value.

All said, the PSI (private sector involvement) dealthe largest ever negotiated write-down of public debt—has reduced the debt burden of every man, woman, and child in Greece by close to €10,000 on average, a sizable contribution on the part of foreign savers.

Well, as if others were saying something else. Right since this crisis broke put and people saw Greece and Europe numbers, restructuring was seen as the only way out. It was opposed by ECB (and Germans) as the banks will have to face losses but they just delayed the inevitable.

He says now the ball is in Greece court (really!!):

Greece now has to do its part―with sustained political commitment to implement the difficult but necessary set of fiscal, financial, and structural reforms that have been agreed as part of the program supported by Greece’s partners in the eurozone and the IMF. It is a huge challenge, no doubt. But it is also an opportunity–to take advantage of the economic space opened up by private and official creditors. Will Greece seize it?

To provide credibility Greece needs to lower its fiscal deficit further, lower its current account deficit and improve competitiveness:

First, it has to bring down its fiscal deficit further. Otherwise, this will simply negate the progress which was just made on the debt. The fiscal effort which has been accomplished already is truly impressive, with the primary deficit coming down from 10 percent to less than 3 percent. The reduction and the rescheduling of debt will help cut interest payments, but this will not be enough in itself to fix the hole in the public finances.

Equally, or perhaps more importantly, Greece has to reduce its current account deficit. For two separate reasons. First, no country can run a large current account deficit and borrow from the rest of the world forever. Second, as fiscal austerity cuts into domestic demand, the only way to return to growth is to rely more on foreign demand to reduce the current account deficit.

There are two ways to become more competitive: become much more productive, or reduce wages and nonwage costs. The first way is much more appealing. But there is no magic wand. While many sectors in Greece show a large productivity gap, the reforms needed involve changes in regulation and behavior, none of them easy to achieve. The program designed with the Greek government tries hard to identify where and how progress can be made. The list is long, but implementation is hard, results uncertain and, in any case, will not come tomorrow. This leaves decreases in relative wages, at least until higher productivity can kick in. 

He argues wage cuts have to be negotiated etc.

In Greece, wages have increased faster than productivity growth for years, compounding the problem. Unit labor costs―which is a key measure of competitiveness―increased by over 35 percent during 2000-10, compared to just under 20 percent in the euro area. This has to be undone.

The best way forward would have been a negotiation between social partners to reduce wages and prices, and avoid a long and painful process of adjustment. This did not happen. The program tries to accelerate the process, while protecting the most vulnerable. The harsh reality is that the adjustment has to take place one way or the other; otherwise competitiveness will not improve, demand will not increase, the current account deficit will continue, and unemployment will remain very high. The faster it does take place, the less pain there will be.

He says the alternatives of Greece exiting Euro was not really there..

The bottom line: will the program work?

 Greece will have to climb a mountain at least as high as the one it has just climbed and success will hinge crucially on the government’s sustained and strong implementation. In all programs, unexpected events will happen, and the program will no doubt have to be readjusted along the way. As Christine Lagarde has said, “the risks remain exceptionally high.”

All this is true. But it is also true that the program deals squarely with the two most fundamental issues facing Greece―not only high debt but also low competitiveness. And it is fair, both in asking for shared sacrifices, not only within Greece, but also between Greece and its creditors.   

Who would believe these lines after seeing so many policy guffaws with respect to Greece and its endless bailouts…

Is Blanchard following this..


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