The eurozone is broken. Will Greece pay the price?

How can Greece grow its economy?
How can Greece grow its economy?

Greece is again in the news for the wrong reasons. National output is still much below potential, unemployment is extremely high, money is leaving the country and there is no prospect of an end to this plight without help from friendly governments.

The problem that Greece is facing now is that with a new left-wing government in office, there may be no friendly governments left.

greece
Christopher Pissarides is a Nobel Prize winner in economics and professor at the London School of Economics.

But this is not how things should be. The politics in the eurozone and the Greek pre-election rhetoric are not allowing the real issues to get a fair hearing.

Forget for the moment the political posturing and the flexing of muscles in Eurogroup meetings. The real issue is whether eurozone mechanisms designed to support members -- or bail them out -- work.

The answer is clearly that they don't. This is not something that we learn from theory or ivory-tower academia. It is something that we see in our economies. And good politicians and economists, when they see something that does not work, they change it.

But change is not what Greece's partners are requesting from it. They are requesting more of the same, ignoring the state of its economy and the wishes of its people.

There is a lot that is good in the rescue programs. Structural reforms in labor and output markets, modernization of the legal system, along with more speedy decisions and privatizations of state enterprises, are essential if Greece is to raise its competitiveness to the levels enjoyed by its partners.

But the fiscal requirements are too stringent for any of the above to work. Eighty years ago we learned from John Maynard Keynes that you don't fight recession with fiscal austerity. His message today is as relevant as it was in the depths of the Great Depression. Greece is in a Great Depression.

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The Greek government was elected in a state of euphoria. Greeks thought its election victory meant an end to austerity, to the troika, to unwanted reforms; it meant a higher minimum wage, more public sector jobs and many other things that inevitably would have pushed the Greek economy further into the past.

But since then the rhetoric has changed to fairly modest requests: an end to the troika visits, and a loan for a few months to allow time to rethink its economic program. Instead of a loan, the Eurogroup is requesting an extension of the program that is ending on February 28. But this would imply more visits from the hated troika. The government was elected on a ticket that said no more visits. It cannot accept this request so soon after its election. This is what the Eurogroup partners are expecting her to accept.

What happens if they don't? Greece will have to carry on with whatever resources it can raise domestically. This is enough to cover domestic needs but not enough to pay for interest on the debt and for repaying the chunks that become due.

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It is logical that any government faced with this eventuality continues to pay its civil servants and meets its other social policy obligations but stops paying its creditors. In other words default on debt payments; the very thing that Prime Minister Alexis Tsipras said he wanted to avoid.

Or it could say that since we cannot get euros to meet our obligations any more, we will issue our own currency and make its acceptance for public sector payments a legal requirement. The euro could continue circulating.

This would effectively mean exit from the eurozone. It could work but at a great cost to Greece and to the eurozone as a whole. The euro would no longer be the single currency providing yet another foundation stone on the way to a united Europe, but a German-dominated club with other members coming and going as they please.

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All this could be avoided if Greece is given an unsupervised loan for a short period of time, say six months, to help the new government find its feet in the complicated world of European finance. It seems to be such a trivial request when compared with the costs of default or Grexit that I expect we will see it agreed in the eleventh hour: this is what European politics seems to require these days.

Christopher Pissarides is a Nobel Prize winner in economics and professor at the London School of Economics. The opinions expressed in this commentary are solely those of the author.

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