Financial Times
May 13, 2012
What would constitute an economically rational choice for Greece, given the economic and political situation? I see four options, each of which is fraught with uncertainty.
The first would be the status quo: more austerity and economic reforms as outlined by the International Monetary Fund and the EU. One risk is that this would keep Greece in an eternal depression and a debt trap, where economic output fell faster than growth. Another is that, while on paper it might just work economically, it would almost certainly fail politically.
Indeed, that may already be happening. Syriza, the hard-left anti-austerity party, heads the latest opinion polls. If this result were replicated at a future election, it would also obtain the coveted prize of 50 additional parliamentary seats, a sixth of the size of the entire parliament. So this would end up with the triumph of extremist parties.
Since this option would work neither economically nor politically, it cannot conceivably be a rational choice.
The second option would be to pursue the same plan until Greece achieves a primary balance – the fiscal balance before the payment of interest – and then to default, or at least to renegotiate the programme with the IMF and the EU. This is more realistic than the first option. A variant of this option was under discussion in the negotiations last week. But there is a risk the austerity needed to reach this point is either so severe, or would take so long, that the political risk would start to have an impact as well.
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