March 20, 2018 - This Policy Insight was written by Barry Eichengreen, Emilios Avgouleas, Miguel Poiares Maduro, Ugo Panizza, Richard Portes, Beatrice Weder di Mauro, Charles Wyplosz, and Jeromin Zettelmeyer.
As stated by CEPR, the authors suggest that, although Greece's third economic programme gives reason for cautious optimism, the country will require further debt relief. The scale and mechanism of its delivery, however, remain controversial.
This Policy Insight addresses these issues, arguing that any further debt relief plan should be based on realistic long-term assumptions and provide Greece with effective incentives to comply. The authors analyse the set of measures currently considered by the Eurogroup, as well as three additional options: face-value debt reduction and incentives; continued ESM financing; and applying existing Eurogroup measures to a broader debt base.
- Even the full set of measures considered by the Eurogroup would not be enough to restore the sustainability of Greece’s debt.
- Of the three options investigated, only one provides a reasonable probability of sustainability: face value debt relief consistent with the “no-bailout-clause” of the EU treaties. The authors show that it is possible to set the relief up in such a way as to provide strong incentives to current and future governments to achieve primary budget surpluses over decades.
- The two other options – extending additional official financing for the foreseeable future to prevent new borrowing from expensive private sources, and applying measures of the type considered by the Eurogroup to additional official loans – make the debt sustainable but only just and that too under favourable conditions. However, these options could be useful in combination with face-value debt relief.
- The successful completion of the third programme for Greece cannot be the end of it. If the objective is to ensure that it will not return to a crisis situation when interest deferrals and grace periods for amortizations come to an end, Greece will require conditional reductions in face value.
a group of independent French and German economists with differing views and political sensitivities but a shared conviction that the current deadlock must be overcome. Reform of the euro area is needed for three reasons: first, to reduce the continued vulnerability of the euro area to financial instability;second, to provide governments with incentives that both encourage prudent macroeconomic policies and deliver growth-enhancing domestic reform; third – and perhaps most importantly – to remove a continuing source of division between euro area members and of resentment of European institutions such as the European Commission and the ECB, which has contributed to the rise of anti-euro populism and which could eventually threaten the European project itself.
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