Stephen M. Walt

Can anything save Greece?

About 13 months ago, I returned from a visit to Greece and said I was increasingly pessimistic about prospects for a successful turnaround there. Money quotation (emphasis added): In order to stave off default, Greece needs to trim its budget drastically (which means throwing people out of work or reducing their incomes), while at the ...

LOUISA GOULIAMAKI/AFP/Getty Images
LOUISA GOULIAMAKI/AFP/Getty Images

About 13 months ago, I returned from a visit to Greece and said I was increasingly pessimistic about prospects for a successful turnaround there. Money quotation (emphasis added):

In order to stave off default, Greece needs to trim its budget drastically (which means throwing people out of work or reducing their incomes), while at the same time stimulating economic growth. The problem is that it’s hard to do both at the same time, because cutting the budget (or collecting taxes more efficiently) reduces domestic demand and thus chokes off economic growth. And because Greece is part of the Eurozone, it can’t stimulate export-led growth by the normal expedient of devaluing its currency. (The sinking Euro helps globally, but not within the Eurozone itself.) Greece’s prospects for economic growth are further handicapped by conditions elsewhere in Europe: It will be hard for Greece to grow if the rest of Europe is stagnant. If the government’s efforts at restructuring lead to widespread political unrest, then chances of robust growth are even slimmer. And once the financial markets begin to realize all this, bond spreads will increase again and we will be back in the same soup we were in a few weeks ago.

All of which leads me to conclude that Europe as a whole is going to be in difficult shape for quite some time, unless EU officials figure out a way to do a lot more than they have done so far. And a double-dip European recession could trigger a double-dip recession here in the United States, which would have profound economic and political consequences (e.g., goodbye to Barack’s second term?)."

Back then, I was surprised that anybody thought differently (i.e., that anyone believed the initial bailout would work). It didn’t, of course, and Greece, the bankers, and the EU are now back in the soup.  As the New York Times reports (my emphasis):

"Analysts and Socialist Party insiders said that Mr. Papandreou seems likely to succeed in passing the austerity package, having secured more support within the party. But economists are nearly unanimous in predicting the loans will only buy time, but do nothing to pull the country out of its economic morass and potential default.

Or as Ken Rogoff, co-author of a terrific study of financial crises ("This Time Is Different: Eight Centuries of Financial Folly), points out: "There is every possibility that at the end of this Greece is going to default anyway."

If that’s true (and it sounds right to me) then Greece may have no alternative but to abandon the Euro and leave its creditors (and the Eurozone countries) to their fates. I’m no expert on these matters, but most of what I’ve read so far tells me that this would be very bad news for the European economy, and for us. But you can relax, because at least things are going well in Libya and Afghanistan and Pakistan and the Mideast and Japan and …

Stephen M. Walt is the Robert and Renée Belfer professor of international relations at Harvard University.

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