ECB’s Draghi Can Play Pivotal Role in Solving Greek Crisis

Bloomberg
Editorial
February 10, 2012

European Central Bank President Mario Draghi has taken a decidedly more activist and creative approach than his predecessor, Jean-Claude Trichet, toward supporting the euro-area economy and propping up its banks. Now, he has an opportunity to take the initiative with Greece, the currency union’s sickest economy.

After weeks of wrangling, Greece is close to completing yet another inadequate deal to fix its finances. If all goes as planned, it will get as much as 100 billion euros ($132 billion) in debt relief from private creditors, and 130 billion euros in loans from the European Union and the International Monetary Fund to help cover its borrowing needs while it carries out austerity measures. The stated goal: to lower the government’s suffocating net debt burden of more than 150 percent of gross domestic product to the slightly less suffocating figure of 120 percent of GDP by 2020 -- a level that would still leave it among the euro area’s most indebted.

Greece’s end of the bargain is extremely onerous. The government must reduce its annual primary budget deficit by about 7 percent of GDP, or more than 15 billion euros -- the equivalent of what it spends every year on social programs. With unemployment at more than 20 percent, industrial production down 11.3 percent in the last year and the economy expected to shrink 4.5 percent in 2012, the budget target all but guarantees that Greece will be back for another bailout, if it manages to avoid a descent into civil unrest.

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