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Pain and gain

3 October 2011 By Pierre Briançon

The story has become all too familiar: Greece makes promises of austerity in exchange for bailout money; it misses budget targets; euro zone governments and the International Monetary Fund make threats; Greece promises more austerity; austerity kicks in; Greece misses targets. The latest budget numbers from Athens confirm that the country is caught in a downward spiral. The global economic slowdown has worsened the impact of last year’s austerity measures, so the country will not meet the terms of its bailout programme.

The new bad numbers add to the pressure on the euro zone and the IMF, which must decide whether to release an 8 billion euro tranche of bailout money in the next few days. They have three unattractive options. They can demand even more austerity – but the Greek government will plead that it can’t do more politically. They can blame the slump and release the money – and lose credibility as demanding lenders. Or they can play tough as long as possible. That makes sense to the creditors, who suspect that Athens doesn’t do everything it can to put its finances in order. But harsh talk increases the risk of a disorderly default.

The cycle of self-defeating austerity can’t go on forever. But Greece needs a fiscal and economic makeover to turn the spiral from vicious to virtuous. It must get serious about tax collection, pare down the public sector, and boost competition in the economy. Lenders should also do their part. Ideally, the euro zone would agree to a larger debt restructuring than that agreed in July, which only forced banks to take a 21 percent haircut on their Greek bonds.

But the EU could also offer more economic help. The Bruegel think-tank has suggested leveraging unused EU structural funds as part of a grand plan to reform higher education, subsidise internal devaluation and improve small and mid-sized businesses’ access to finance. Such efforts would take years to bear fruit. In the meantime there would still be austerity. But the Greeks would know that the euro zone has more to offer than pain.


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