The Greek crisis: Two paradoxes | The Economist

What makes this problem so difficult to solve is that there are paradoxes at the heart of each side’s position. On the creditors’ side, they do not want to see Greek debt relief until reforms have been carried out. This is partly to establish an example for other nations and partly because of the difficulty of selling such a deal to their own voters. But the harder they push the Greeks, the more likely it is that the latter will be forced out of the euro, in which case default will occur anyway. And the EU would be obliged to offer some kind of aid to Greece if it fell out of the euro, on humanitarian and geopolitical grounds. So the harder the EU pushes, the more they end up with the result they don’t want; paradox 1.

On the Greek side, default would eliminate the debt burden and offer the potential, via devaluation, for a return to growth. But if all the competitiveness gains of a return to the drachma were thrown away in higher inflation, then the Greeks would be barely any better off; the risk is they end up as Argentina without the soyabeans. To make euro exit a success, they would need to undertake the kind of structural reforms and fiscal prudence that they are resisting as the price of staying in the euro; paradox number two.

via The Greek crisis: Two paradoxes | The Economist.

Both comments and trackbacks are currently closed.
%d bloggers like this: