June 9, 2011
An irreverent official at the International Monetary Fund recently installed a jarring ringtone on his mobile phone. It is the sound of cans being kicked down a road. That, alas, is what Europe’s politicians and the IMF look set to do with their latest rescue plan for Greece. Though the details are still being hammered out, it is already clear that the package—likely to involve an extra €85 billion ($125 billion) or so—goes only part way, at best, towards dealing with Greece’s economic woes.
Those problems are by now painfully well known. First, Greece’s moribund economy is hopelessly uncompetitive. Since membership of the euro rules out the fillip of a cheaper currency, the country’s only route to growth is through deep reforms that slash costs and boost productivity. Second, the government is bust. Despite the austerity of the past year, introduced as part of Greece’s first rescue package, its primary budget (ie, even before debt payments) is still deeply in deficit. Under any realistic assumptions for future growth and interest rates, its stock of debt, at 150% of GDP and rising, is unpayable.
Dealing decisively with the Greek mess means addressing both the lack of competitiveness and the insolvency. The new rescue plan makes progress on the former, but does little on the latter. As a result, even if the Greeks do everything that is asked of them (itself a big if), another crisis will loom before long.
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