The European Union has moved forward incrementally during the financial crisis, introducing piecemeal changes to economic policy-making in the euro zone. Problems have been solved gradually, in an often clumsy decision-making process. The question is whether this kind of process is enough to solve the Greek crisis or whether, despite the agreement reached after hours of talks in Brussels, a more fundamental change of direction is required.
The deal agreed after a marathon negotiating session in Brussels last week was welcome, in so far as it removed the immediate risk of Greece leaving the euro zone. That said, the way it was reached showed European decision-making at its worst, and the deal as it now stands is unsustainable. There is an opportunity to fix this, but trying to deal with it in small steps over a period of years is unlikely to be enough. Put bluntly, Greece needs significant and immediate debt restructuring.
As the IMF, the EU Commission and many others have pointed out, the rescue plan for Greece cannot work unless that country’s debt burden is cut. Its national debt is just too high, and will be added to by funds it would borrow under a new bailout. A manageable debt level is vital if Greece is to have any hope of attracting new investment into its economy, and more particularly its sovereign bonds, in the years ahead. Without debt relief, Greece will never have a hope of starting to rebuild its economic future.
Politics means that much of this has turned into a blame game. Greece itself, and its new government in particular, has been heavily criticised for getting into such a dire economic position. And they do have to share the blame, for the folly of overspending in the period leading up to the first bailout, for lack of reform in many areas and for the tactics of the Syriza-led government over the past six months.
That said, Greece did much during the bailouts to correct its budget position, and blame lies elsewhere, too – with the lenders who funded country’s spending spree for many years, and the faulty structures of the first two bailout programmes, which were not build on solid foundations. It is understandable that Greece’s creditors seek reforms in return for fresh cash. But realism is needed too in relation to what is sustainable. One way or another, the funds extended by the other EU member states to Greece are not going to be repaid for, at best, a very long time. Surely if Greece commits to move in the direction of reform, it is better to recognise this reality.
Pressure from the IMF may help this to happen. Europe has promised to look at Greece’s debt in a few months time, assuming a programme is up and running by then. Despite the long day and night of talking in Brussels, there is still a long way to go.