Back to reality: Greece needs debt relief and wide-ranging financial reform - both are going to come, but will they be messy or orderly?


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The Independent Online

The great Greek debt drama has been running for so long, with so many cliffhangers and deus ex machina reprieves, that it is difficult to believe that the next few days really will mark a denouement. Technically, the Greeks have already defaulted on their debts, and, less technically, still want to have it all: membership of the euro, while not honouring their debts or reforming their badly uncompetitive economy. And their banks are running out of cash.

The truth is their debts are just too big, and a significant chunk of them will need to be written off. But neither the EU nor the IMF should agree to do so unconditionally – there can be no “something for nothing” deal with Athens.

Complicated and vexed as the Greek problem is, the answer is fairly obvious and has been for some time: debt relief has to be linked to long-term reforms. Austerity, as such, is also needed – but not at the cost of destroying any prospects for growth and making the debt burden worse. Decisions on the scale of a government deficit have to be taken in the context of a wide range of other factors – austerity in and of itself is not a policy.

An external shock – say a steep rise in the price of oil – would mean a programme of austerity should be reassessed, but what is lacking in Greece is any sense of determination to put its public sector in order. Collecting taxes, delivering efficient services and paying wages and pensions in line with Greece’s ability to afford them are basic principles that seem not to be taken seriously by Alexis Tsipras’s government.

As the IMF acknowledges, Greece’s debts are unsustainable and restructuring is inevitable. Greece has a choice between a messy and deeply damaging wholesale default and a measured, orderly alteration in its debt burden. Greece’s creditors obviously prefer the latter. Mature officials in Angela Merkel’s chancellery, in the German finance ministry and Bundesbank – the principal players on the creditor side of the ledger – certainly do so. If it is not too painful for them, they need only to think back to the unbearable burden of debt landed on Germany itself after the Great War to realise how silly and how dangerous it can be for foreign governments to try to make a people pay when they cannot do so, even if they wanted to.

Greece’s debts were freely entered into and not imposed on her, but the basic truth about being realistic about debt repayment remains. The IMF also has long experience of dealing with heavily indebted states, though this is the first time since the Second World War that an advanced economy has defaulted.

So Greece’s partners have a good deal of bargaining power: the prerogative to restructure and forgive some of the debt, and, in the EU’s case, the power effectively to expel Greece from the eurozone if she fails to comply. In the circumstances it is remarkable that the Greeks have managed to put up so much resistance against overwhelming odds, but so it has proved. Now, according to the polls, the Greek nation is split on whether to accept the latest compromise proposals, and the last chance to stay in the euro.

Even if the endgame is postponed a little longer, and order eventually arises from the financial and political confusion, Greece will be a traumatised nation. Yes, the buses are running, the bars are open and the Acropolis still stands, but Greece will need all the help it can get from its friends to survive the next few years. In return, the Greeks will need to deliver more than referendums and protests.