February 19th, 2015

Greece needs time to negotiate

Economics & Politics

While the Greek crisis continues to rage, the eurogroup — the eurozone’s finance ministers — spent the past week quibbling over details in Brussels while the world waited breathlessly to know if the eurozone is going to derail the global recovery. The way forward is obvious. The world will not forgive the eurozone, led by Germany, if it ignores the obvious.

These are the facts: Greece has a newly elected government because the Greek people understandably have asked for a new approach to overcome the prevailing 26 per cent unemployment. This new government needs around 90 days to find its feet and make new arrangements with its creditors.

During this 90-day period, Greece also needs to make several billion dollars worth of payments to its eurozone creditors and the IMF, and these payments will require new loans. Greece also faces a self-fulfilling run on its banks as a result of the prevailing uncertainty. It is the stuff of introductory banking textbooks. Why keep money in Greek banks if they are at risk of collapse because of a run and a lack of ECB financing?

Greece and its creditors therefore need 90 days reprieve to sort things out — this is the obvious part. If they can’t resolve their financial and philosophical disputes during that period, Greece will probably be pushed out of the eurozone. So be it. Greece might well live happily ever after (though one would doubt it), while the eurozone would suffer a decisive collapse of credibility from that point onward.

Both Greece and the eurogroup should say that the 90 days are a period to try to find a creative and mutually satisfactory solution to the existing problems. The debts should be rolled over, with new IMF and European Financial Stability Facility (EFSF) loans replacing those falling due. The ECB should provide liquidity to Greek banks, knowing full well that the deposits now fleeing the country will quickly revert to Greece if and when a new accord is reached. Depositors prefer to keep their deposits close to home when it’s safe to do so.

The Greek government has repeatedly called for a 90 day period to search for solutions, with Finance Minister Yanis Varoufakis declaring earlier this week that Greece would readily apply for an extension of the current loan agreement in order to find common ground with its creditors. Hardline eurogroup members, however, led by Germany and the Netherlands, have repeated one line and one line only: Greece has an existing program and must successfully conclude it.

The Greek government has properly and calmly repeated that it was elected to improve the program, not merely to complete it. This is a plausible position given Greece’s desperate economic situation. As Mr Varoufakis has said about Greece’s economic crisis, “This is not a game.”

I am certainly no German-basher. Germany has one of the world’s best-run economies. It has earned its prosperity, not taken it from others. Despite the complaints of its less competitive neighbours, German policies are not “beggar thy neighbour”. Greece’s deep crisis is not caused by Germany, but by Greece. Yet Greece has a very deep crisis nonetheless, and the current government is responsible for addressing it, including through good faith negotiations with its creditors. Yet good faith negotiations require both parties.

As Greece’s program expires, the choice is the eurogroup’s alone, and indeed mainly Germany’s: blow up the eurozone now, or spend 90 days searching for a solution, which admittedly may not exist. I strongly believe that such a solution does exist, but only serious negotiations will tell. With the global stakes so high, the world expects powerful, democratic nations like Germany and the Netherlands to search for solutions rather than acting in a preemptory manner that puts the entire world economy at risk.

Read the full article at the Financial Times


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