Greece Makes Progress, but Debt Woes Persist

by Ian Campbell and Rob Cox

Reuters Breakingviews/New York Times
March 8, 2011

It’s hard not to sympathize with Greece after Moody’s latest downgrade of the country. Like Sisyphus, the government has been pushing a heavy rock uphill. It has gotten somewhere, as Athens asserts. The fiscal deficit is six percentage points of gross domestic product lower than it was. But the debt burden will probably prove too heavy and roll Greece back into crisis. The market views a restructuring as highly likely. But while that would fix Greece’s debt problem, it would not in itself solve the country’s competitiveness and growth challenges.

Greece’s problem is that it needs a further fiscal adjustment of the same magnitude to that already made just to get close to balance. Even that would not really be enough. Greece needs to be recording fiscal surpluses so that savings can permit the country to reduce its debt burden of 150 percent of G.D.P.

But the inevitable side effect of government cuts is that the economy will contract further. It shrank by 4.5 percent in 2010. But this year the administration aims to adopt further fiscal tightening to cut the deficit by 4.5 percent of G.D.P. As huge cuts eat into employment and domestic demand, the economy will get smaller and weaker and the debt burden relatively heavier.

The only way to achieve Greece’s challenge is through rapid export growth. World trade made a strong recovery in 2010, facilitating that. But Greek exports didn’t participate much in the revival. Export earnings improved, but volumes stagnated.

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