by Costas Meghir, Dimitri Vayanos and Nikos Vettas
Financial Times
August 23, 2010
Greece’s default is viewed by many as a foregone conclusion. Financial markets put the probability as higher than 50 per cent that Greek bonds will become worthless over the next five years. But we believe default can be avoided through overdue reforms. These must combine deregulation and long-term investment in education to restore competitiveness, with radical pension, healthcare and tax reform to eliminate pressure on public finances and improve incentives. They will be difficult but possible – the commercial lorry drivers’ strike was called off after the government stood firm.
The pessimists’ argument is simple. Greece’s public debt is projected to rise to 150 per cent of gross domestic product in three years. To move from the currently large primary deficit to the large primary surplus required to service the debt will require huge cuts in government expenditure which have to be impossible politically. Recent data showed Greece plunging deeper into recession and a sharp rise in the year-on-year jobless rate. Greece’s low competitiveness precludes high GDP growth in the future.
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For a fuller version of this argument read this paper and/or visit the site Greek Economists for Reform
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