With Greece locked in a struggle with international lenders over unfinished reforms, Nobel Prize-winning economist Paul Krugman has written he fears it could accidentally force the country out of the Eurozone and jeopardize the entire financial bloc of 18 countries.
Krugman, in an op-ed in the New York Times, says the dilemma is that the troika of the European Union-International Monetary Fund-European Central Bank (EU-IMF-ECB) won’t back off demands for more crushing austerity that the Radical Left SYRIZA party of Prime Minister Alexis Tsipras was elected to oppose.
The standoff, with neither side blinking after Tsipras initially moved to renege on virtually all his campaign promises before drawing a line in the sand, has frayed tempers on both sides with Greece’s critics, primarily Germany, snapping a mixed messages from the coalition government that includes the far right-wing Independent Greeks (ANEL) brought in to give a majority in Parliament.
Greece on Feb. 20 reluctantly accepted a four-month extension to bailouts Tsipras said initially he didn’t want but was forced to accept after the ECB squeezed off liquidity and the lenders warned capital controls could be imposed as a run was growing on the country’s banks.
Tsipras got the right to come up with a list of reforms but Finance Minister/Blogger Yanis Varoufakis so far has produced only several vague outlines that didn’t come with projections to meet fiscal targets.
Greece five years ago began taking what turned into two bailouts of 240 billion euros ($260 billion) from the troika, most of which is running out, but those came with attached harsh measures for big pay cuts, tax hikes, slashed pensions and worker firings – and the creditors want more.
“These immense sacrifices were supposed to produce recovery. Instead, the destruction of purchasing power deepened the slump, creating Great Depression-level suffering and a huge humanitarian crisis,” Krugman said, driving angry Greeks to force out two previous governments to give SYRIZA a shot.
Many are so furious they are willing to bet – as is Tsipras – that it will be the lenders who will blink first, fearing a ripple effect on the Eurozone and the political cost to leaders in other countries who would be forced to have their taxpayers pay the cost of the loans if Greece defaults.
With so much at stake, Krugman said there could be an accidental rupture that could bring down both Greece and the Eurozone, although he proposed an alternative.
“It has been an endless nightmare, yet Greece’s political establishment, determined to stay within Europe and fearing the consequences of default and exit from the euro, stayed with the program year after year,” he said, with the result that even a 74 percent write-down on bonds held by investors hasn’t brought down the country’s still staggering 313-billion euro ($330 billion) debt.
THE WAY OUT
“The irony of SYRIZA’s victory is that it came just at the point when a workable compromise should be possible,” he wrote, and as the country seemed to be on the verge of recovering, despite conditions so brutal they decimated the poor, workers and pensioners while sparing the rich and politicians.
“The key point is that exiting the euro would be extremely costly and disruptive in Greece, and would pose huge political and financial risks for the rest of Europe. It’s therefore something to be avoided if there’s a halfway decent alternative. And there is, or should be,” Krugman added.
“The shape of a deal is therefore clear: basically, a standstill on further austerity, with Greece agreeing to make significant but not ever-growing payments to its creditors. Such a deal would set the stage for economic recovery, perhaps slow at the start, but finally offering some hope,” he said.
The tricky part is that neither side seems willing to budge or reason, each insisting its way is the only way with the immense costs looming unless there is a compromise that satisfies both the demands for reasonable reforms without sacrificing more of the same Greeks who’ve already borne the brunt.
So far, that isn’t happening. “Right now that deal doesn’t seem to be coming together. Maybe it’s true, as the creditors say, that the new Greek government is hard to deal with. But what do you expect when parties that have no previous experience in governing take over from a discredited establishment?” he asked.
How will it end?
“Avoiding a full-blown crisis would require that creditors advance a significant amount of cash, albeit cash that would immediately be recycled into debt payments. But consider the alternative,” he said.
“The last thing Europe needs is for fraying tempers to bring on yet another catastrophe, this one completely gratuitous.”