Europe's Still Dithering Over Greece

Jeroen Dijsselbloem and Euclid Tsakalotos find something to smile about.

Photographer: Emmanuel Dunand/AFP/Getty Images

This week, the European Union’s finance ministers granted some new debt relief to Greece. The new “short-term” measures are better than nothing -- but they’re less than a convincing solution to a problem that has dragged on far too long.

The deal, sketched out and agreed to in principle earlier this year, should help the Greek government convince voters to keep accepting much-needed domestic reform. That’s good. It isn’t enough, though, to put the country’s debts and budget plans on a sustainable footing. That’s why the International Monetary Fund, whose support will be necessary to achieve that larger goal, isn’t yet on board. After years of muddling through, the issue still isn’t resolved.

In the approach to the latest talks, French Finance Minister Michel Sapin acknowledged that “Greece has made huge efforts. This is the first Greek government in a long time that has implemented its commitments.” He said it was vital that Europe respond by recognizing its obligation to help ease the country’s debt burden, both as a reward and to encourage further improvements in the business climate.

All true. Greece can’t be accused of doing nothing to help itself. The banking system has stabilized after three bouts of recapitalization, and deposits are returning, albeit slowly. The economy is growing modestly. The country posted a primary budget surplus for the first 10 months of this year. State asset sales are proceeding slowly but surely.

These efforts justify extending the repayment schedule and swapping some floating-rate debt to fixed payments at the current low rates, as announced. But the expected reduction in Greece’s debts relative to its economic output by 20 percentage points through 2060 is far too timid -- while the idea that Greece can achieve an annual primary budget surplus of 3.5 percent of output throughout the coming decade is a fantasy.  

The austerity designed to put Greece back on track -- including smaller pensions, civil-service redundancies, other cuts to public spending, and higher taxes -- has already inflicted real hardship. Unemployment stands at more than 23 percent. New strikes and other protests are planned. The last thing the EU needs is worsening conflict in Greece to add to the turmoil in Italy.

In their own interests, the creditor governments need to be more decisive. As long as Greece’s debt overhang remains unresolved, the country will be shut out of international capital markets, blighting its prospects and adding to the burden it puts on EU governments. Allowing Greece to remain a supplicant and a political embarrassment to other governments creates a potential source of new instability.

QuickTake Greece’s Financial Odyssey

It’s widely acknowledged that the country’s debts, even after this week’s measures, will not be paid back in full. Facing up to this now, with sufficient relief to make the debt position sustainable, would help the rest of the union as much as it would help Greece.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.