More flip-flops over Greece will not do

by Nils Pratley

Guardian
July 20, 2011

At the Brussels summit, eurozone leaders must produce a package that shocks and awes the market. More flip-flops over a Greek default will not do. More pretence that soaring bond yields in Italy and Spain can be dealt with another day will not work. More squabbling between politicians would be disastrous. As José Manuel Barroso, president of the European commission, put it : "Nobody should be under any illusion: the situation is very serious."

The easy bit – or easyish – is addressing the Greek debt crisis. It is clear the first bailout failed. The Greek economy, saddled with high debts and no growth, will not recover if the only medicine is austerity and more loans at unaffordable rates. Greece's problems are not a squall that will pass if only the bailouts keep coming. That approach just delays the day of reckoning. The solution starts with debt relief.

The precise design of the Greek package doesn't matter terribly. Many of the various proposals – especially the buying-up of Greek bonds – have merit. The eurozone leaders must simply choose which formula they prefer and implement it, letting creditors know where they stand. If the European Central Bank has to be cajoled into supporting the Greek banking system after a default, then so be it.

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