National Interest
September 2, 2011
News from Greece keeps getting worse. The recession is deeper than expected, social tensions are rising and the government says its 2011 deficit target will be hard to meet. Many analysts surely feel vindicated; they have long argued that Greece’s program will fail. Yet they were and remain wrong. Greece faces a political and economic crisis—debt is only a symptom, and there is no point in treating the symptom but not the disease. For that, Greece needs to keep on its current path.
The case against Greece is simple. When Athens received a bailout in May 2010, its debt over GDP ratio was set to peak at 149 percent in 2012–2013. Now it will reach 172 percent due to a revision in the numbers, a deeper recession and increased support for Greek banks. Meanwhile, GDP in Q2 2011 fell by 6.9 percent, bringing the country back to its 2004 GDP levels. Evangelos Venizelos, the finance minister, admitted that GDP could fall by more than 4.5 percent this year, the fourth revision from an initial -3 percent. It will be a decade before Greece recovers to its precrisis GDP and perhaps longer before debt crosses below the psychological threshold of 100 percent of GDP.
Critics say that the current approach—austerity, bailouts and a partial, voluntary restructuring— merely throws good money after bad. It does nothing to help Greece or to calm markets. Athens has three (overlapping) options: it can default, it can leave the euro to devalue its way to growth or it can get Europe to guarantee its debt. But these solutions are no solutions at all. They misdiagnose the problem—they want to give aspirin to someone with a broken tooth. Aspirin helps, but Greece needs a dentist.
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