A Greek Drama

The gross domestic product of Greece is only about 1 percent of the eurozone’s total GDP, but the Greek economy has been the center of the world’s attention for weeks. On June 27, with the previous rescue package due to expire, Greek Prime Minister Alexis Tsipras proposed a public referendum on the new bailout agreement; over 61% of the Greek people voted no. Days later, the Greek government presented an economic plan and on July 13 the eurozone leaders approved a third bailout, which still needs to be approved by the Greek parliament.

We talked with Professor of Economics Dirk Krueger to get some perspective on the situation.

SA: What is the attitude of the rest of the eurozone toward Greece right now?

DK: I think the countries such as Latvia, Lithuania, and Estonia, which have a GDP per capita that’s about 60 to 70 percent of that of Greece, are saying, what are you guys talking about? You want a rescue package from countries that are effectively poorer than you in order to have a living standard that’s larger than ours. 

And Spain has done very harsh, very painful reforms to get its house back to order. Italy and Portugal have taken action. They had a full justification for saying, look, if there has to be any rescue package, it has to come with very concrete, very implementable promises from Greece for significant reforms.

SA: Given that, why did the Greeks vote no in the referendum? 

DK: The Greeks have suffered. Income per capita in the last five years has fallen by 20 percent. I think they understood that, no matter what they do, for the next five to 10 years they’re going to look into the face of a hard economic future. And they say, well, at least let’s have our dignity, and let’s have our own fate in our hands, rather than somebody else dictating that.

SA: What effect did the referendum vote have on the situation?

DK: Prior to the referendum, it would have, I think, been possible to augment the second rescue proposal without the 18 parliaments of the other eurozone countries approving it. Now any new proposal has to be approved by parliaments of a subset of the other 18 nations. So valuable time has been lost, and the conditions Greece received appear to be no more favorable than the ones discussed prior to the referendum. 

SA: What are the arguments for keeping Greece in the eurozone?

DK: My own take is it’s purely political. The strongest economic argument was the contagion argument, that if Greece goes, the crisis will spill over into a larger financial crisis in Europe. I think that was a valid argument in 2010, but not any longer.

I think the political cost would be quite high. If Greece gets out of the euro, the euro project fails. It’s the first time a country leaves. There are no provisions in the European treaties for something like that because it was thought to be inconceivable. My cynical view is that I think this was done on purpose in order to not make it happen, to make sure that this could never happen. I think Ms. Merkel will do whatever it takes to try to keep Greece in the eurozone. She does not want to be the chancellor under which the European project breaks down.  

SA: If you were king of the eurozone, what would you do?

DK: The first step was for the Greeks to create a proposal with hard numbers which the rest of Europe could take as a credible proposal. Now that they have done that, I think there has to be a massive write down of Greek government debt eventually, perhaps to the level of 100 percent of GDP, which would almost be cutting the debt in half. Perhaps it could be coupled with making the remaining debt long-term rather than low-maturity, meaning that it’s not due every six months because otherwise you have a crisis every six months. I think incentives have to be such that, for every step of Greek reform, there’s a new tranche [portion] of help being paid and a new level of debt being forgiven.

SA: What dangers remain?

DK: Does this proposal give enough justification to the European Central Bank to continue supporting the Greek banks? The moment the ECB does not extend further credit to the Greek banks, that basically would force actions on Greece’s part that would amount to a slow “Grexit,” Greek exit, from the euro. Greece would not be able to import the goods, including vital medicine, it needs to survive.

Greece also needs to approve the offer. Whatever you say about the current government, it is the case that they inherited a massive mess for which they were clearly not responsible. But I think they are guilty of promising more than they could possibly hope to deliver.