Paying the Price of Austerity.

Photographer: Kostas Tsironis/Bloomberg

How to Save Greece Now

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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The Greek parliament's decision to trigger elections by rejecting Prime Minister Antonis Samaras's presidential candidate throws Europe back into turmoil. The European Union can avert a full-blown existential crisis, however, if it acknowledges that Greece's economic pain is real and not entirely self-inflicted, and that austerity fatigue is an issue for more than one euro member.

Greece's Fiscal Odyssey

Polls suggest that the opposition Syriza party may win power in Greece; its leader, Alexis Tsipras, wants to unwind government spending cuts to halt what he calls a "humanitarian crisis'' in his country. If he does win the prime minister's job on Jan. 25, the EU will need to take his concerns seriously, recognize that fiscal backtracking is preferable to seeing Greece exit the euro, and concede that the unfortunate solution to the nation's unsustainable debt is to forgive some of it.

The economic hole Greece finds itself in is a deep one: 

The rules of euro membership, laid out in the 1992 Maastricht Treaty, stipulate that a country's debt should be no higher than 60 percent of gross domestic product. Greece's is three times that much -- high enough for the common currency club to show Greece the door. EU leaders know, however, that their earlier failures to punish deficit offenses by Germany and France, combined with persistent transgressions since then, make enforcement impossible.

Bond investors, who've been signaling disquiet ever since Samaras announced his presidential gamble a few weeks ago, have, in the wake of today's vote, driven Greece's three-year borrowing close to 12 percent. That trashes any hope Greece had of unhooking itself from the life support system of emergency aid and returning instead to capital markets to meet its financial needs:

The forthcoming election could rekindle the turmoil that's threatened to unravel the euro in recent years. European Commission President Jean-Claude Juncker's recently announced plan to invest 315 billion euros in infrastructure programs is a tacit acknowledgment that the EU needs to do more to boost growth. But that sentiment needs to be reflected in future negotiations with Greece's leaders, and indeed with other euro members whose electorates are growing dangerously weary of austerity.

The EU's apparatchiks will need to take seriously Syriza's demands for an easing of Greece's economic strictures -- or risk turning the political drama into an economic crisis. If Greece were to abandon the common currency project, it would call into question the membership credentials of other euro nations. (Note that Portuguese bonds are also taking fright today.)

With Greece stuck in critical care for the foreseeable future, the troika of the EU, the International Monetary Fund and the European Central Bank will have to write off a chunk of the nation's 322 billion euro ($393 billion) debt. It's a terrible solution, since the cost of debt forgiveness will ultimately be borne by the euro zone's taxpayers, but it's better than any alternative in sight. 

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor on this story:
Mary Duenwald at mduenwald@bloomberg.net