How to Deal with the Current Greek Crisis

The problem for Greece is that meeting most of the austerity focused demands won’t do anything for growth, which Greece desperately needs. And another year of austerity is unsustainable—after five years of utter misery with a drop of 25% in GDP and an increase to over 50% youth unemployment, with a humanitarian crisis the result.

While the Council and Commission have actually introduced increasing flexibility into the interpretation of the rules for ‘normal’ (non-program) countries, and have put the emphasis on investment and growth-oriented ‘structural’ reforms, they appear to remain largely inflexible on Greece.  The problem is that while some Northern European countries (Germany but also Finland) believe that austerity works, governments of countries that have had to impose austerity on their own populations (especially the Baltics, Spain, and Portugal) or are now in the midst of putting ‘structural reforms’  of labor markets and pension systems (France and Italy) are not about to let Greece off the hook, for fear of their own constituencies’ responses.  But this is counter productive.

Greece needs to stay in the Eurozone for its own benefit as well as everyone else’s.  But what they need is not yet another austerity program.  Instead, why not recognize that they need growth, and give the government a two year period of grace…no austerity, release of the monies to repay the IMF, and ECB guaranteed bank liquidity  in exchange for an agreement from the unions not to raise wages, for the government to collect taxes from the non-paying rich (including the expatriates with the help of international institutions), major reform of the state administration, rationalization of the rules to make it easier to start businesses, plus investment funds for small and medium sized enterprises, to reignite the private sector that has been dying on the vine these last few years.  Moreover, the EU ‘institutions’ (formerly known as the Troika) should transform themselves, moving from ‘enforcers’ to ‘advisers’, to help the Syriza government implement reforms that will not be easy.

Only by changing completely the program—and the discourse justifying it—can Greece stay the course, and succeed.  Greece has suffered enough, and should be given another chance to prove that it can succeed—with a program that has a realistic chance of succeeding.  This is the new message that Eurozone leaders should now agree on, and convey to their constituencies.

See A Finance Minister Fit for a Greek Tragedy? in Sunday's New York Times.