Greece and its principal creditors—the European Union, European Central Bank and International Monetary Fund—should acknowledge that Athens will never be able to repay the €131 billion it owes, write down its debt and let the Aegean nation exit the euro gracefully.
Greece and the Troika are desperately trying to patch together another round of tax increases, spending cuts and labor market reforms aimed at increasing the share of Athens’ budget devoted to debt service and instigating growth—the former is easy but the latter impossible.
Already, Greece’s taxes now exceed spending, excluding interest payments, by about 1 percent of GDP, but its debt continues to grow.
Since 2010, Greece’s economy has contracted 25 percent, and its debt has soared from 130 to 180 percent of GDP. I know of no modern nation that has dug out of a pit so deep without restructuring—the polite word for a sovereign nation writing down or repudiating its debt.
A new deal is needed by June 30 to extend the current bailout through November and permit Athens to repay the IMF €1.54 billion.
Prime Minister Alexis Tsipras wants to raise taxes more and cut spending less than the Troika will approve. But this dickering is comical in its scope and implications.
Greece plans to raise its corporate tax rate to 29 percent, but the IMF and other creditors insist that rate be limited to 28 percent, and instead pensions be cut more, because a lower tax rate would better foster growth.
After what has transpired these last five years, it is hard to believe anyone involved honestly thinks a one percentage point difference in the corporate tax rate would make a difference and reverse Greece’s economic death spiral and rocketing debt.
Just to keep Greece going through November, Athens will require €15.3 billion in additional credit, raising its debt to €146 billion.
Athens needs at least half its debt forgiven to finally stabilize its finances and rekindle growth, and successive rounds of austerity and lending will only exacerbate the losses creditors must accept in the end.
The rub is that Greece owes the Troika in one form or another about €100 billion with the rest held privately.
Writing down a good chunk of that debt would discredit the principal architects of austerity—German Chancellor Merkel and IMF Director Christine Legarde—but Greeks are paying a heavy price to sustain their reputations. Unemployment stands at 25 percent, and private sector wages are down by a similar amount.
Pushing down wages hasn’t worked for Greece, because it lacks a well developed export sector. Most foreign receipts are from petroleum refining and shipping and are not as sensitive to movements in wages as making tee shirts or assembling electronics in Asia.
For the Troika, the only sensible options are to write down Greece’s debt now, lest it bear even bigger losses later, or let Greece leave the euro. The latter would impose losses as the Greek debt, remarked in drachma, fell in value as the new currency depreciated to balance Greece’s foreign payments and receipts.
Normally currency depreciation would impose a lot of pain on the debtor state as the cost of imports rise and inflation flew out of control, but Greece also has a limited import sector. The Greeks make more of what they consume than in most small countries, and much farming and manufacturing abandoned after the introduction of the euro could return.
Much would depend on the terms of Greece’s exit. If it remains a member of the EU without the euro, or at least continue to have tariff free access to EU markets, it would attract foreign investment and the drachma depreciation and creditor haircuts would be more limited than if Germany and the others insisted on banishing Greece from the EU altogether.
Mr. Morici is an economist and business professor at the University of Maryland, and a national columnist. He tweets at @pmorici1
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