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IW Director Michael Hüther in "die Welt" Contribution 19. June 2015

Rapid assistance for Athens

Without a doubt, Greece has made headway on a rocky road so far, implementing cuts on government spending (including the military) as well as on wages and pensions, and liberalising its labour market. In cyclically adjusted terms, budget positions between 2010 and 2014 indicated a significant upswing from -9.4 per cent to +1 percent, with the OECD referring to Greece as one of the most reform-dynamic states. Nevertheless, it remains clear that these measures do not suffice, and that significant problems persist.

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Corruption and tax evasion are rife and have not been addressed. Similarly, increasing energy prices are having a negative impact on competitiveness, markets for goods and services have not been liberalised to the extent required, and the state continues to be hypertrophic.

In this context, the Greeks perceive themselves as victims, ignoring their own role on the road towards disaster, which since 2000 included running up enormous levels of new debt combined with a significant rise in unit labour costs. Meanwhile, Greece’s partners in Europe, who have shown historic levels of solidarity, have failed to acknowledge that the implementation of responses to the 2010 crisis needs to be reviewed – after all, these responses had never before been considered, and all possible response scenarios turned out to be contrary to the rules.

In 2010, Europe had sought help from the IMF, as it didn’t have its own institutions, and pushed for a detailed adaptation programme to achieve the desired results rapidly. While this approach is acceptable in the midst of a crisis, over time it becomes increasingly difficult to communicate as it is not compatible with the concept of joint democratic sovereignty. Furthermore, Europe has in the meantime established new institutions. So which kinds of compromise presently appear feasible?

(1) From the start, Tsipras’ government insisted on a debt cut to reduce the debt burden. However, in view of the actual interest burden, this solution is not absolutely necessary, and it won’t resolve the country’s structural problems. However, Greece’s ability to pay is impacted by the principal payments it is required to make to the IMF. In this context, one approach could be to have the ESM take over government bonds currently held by the ECB and the IMF, as suggested by the Greek government. As a result, it would be possible to subject these loans to the agreements concluded in November 2012. At the time, maturities were extended from 15 to 30 years, and interest rates for assistance loans were lowered.

(2) Pooling Greek government debt would mean more flexibility. The cash value of the entire payments of interest and principal could be kept at a constant level, avoiding losses for the creditors, while the time structure would depend on positive GDP rates. That way, in years of economic contraction, fewer interest and principal payments would have to be made. A possible gap in the balance due at the time of the last payment in 2044 could be closed then.

(3) This kind of agreement could be acceptable for the Greek government if it was left in charge of ensuring the debt is served by making the correct payments of interest and principals to be determined at the start of each year, and of achieving the primary surplus required for workable levels of government debt. On the basis of a consolidation path, the government could decide itself where to make savings and how to distribute the burden. After all, it is not possible to negate the democratic sovereign of any country, even a country in crisis, if the state of emergency is to be overcome.

(4) However, the credibility of such obligations would need to be secured by having Greece accept an international agreement on the enforcement of individual claims in case of default, for example by surrendering its fiscal sovereignty for a set period of time. That way, the Greek government would be the master of its own fate and dignity, and Tsipras would be able to prove that he is sincere. At the same time, Europe would be able to demonstrate its ability to act without losing its credibility.

(5) This package could be combined with a European commitment to establish a European defence community as soon as possible. That way, the integration pledge would receive new impetus, and it would follow an economic rationale in that it would constitute a Europe-wide public asset. At the same time, the crisis countries could be liberated from this burden of solidarity, as a European army would be funded at least in part by a European tax. In this scenario, the Grexit crisis could mean a step forward for Europe.

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