Experts react to Europe’s bailout package for Greece

ΠΗΓΗ: Washington Post

Late Monday night, the euro zone agreed to a $170 billion bailout package for Greece in exchange for certain budgetary oversight measures and economic reforms. We asked a group of experts and economists to weigh in on the deal — and whether it’s enough to hold Greece — and Europe — together. Here are their reactions:

Kevin Featherstone, professor of contemporary Greek studies at the London School of Economics:

“Will the deal work? With this deal, Greece has only overcome the first of several hurdles. It remains to be seen whether the package will continue to be challenged by strikes and protests. Even then, there must be questions as to whether the necessary structural reforms can be implemented in a full and effective manner by an underperforming administrative system.

“At the same time, it is very important to question the content and schedule of the package being imposed on Greece by the Troika [the International Monetary Fund, European Commission and European Central Bank]. It stresses clumsy across the board cuts calibrated by fiscal constraints, rather than a coherent set of choices that might lead Greece towards a better model. In this sense, the package is too closely set to appease the insularity of foreign voters, rather than to achieve the shared interest of returning Greece to growth and putting the euro-zone on a more solid basis. In time, this bias will need to be adjusted.”

Vincent Reinhart, economist at the American Enterprise Institute, and Carmen Reinhart, economist at the Peterson Institute for International Economics:

Policymakers and investors seem to have taken some solace from the announcement that European financial ministers have agreed to a bulked-up rescue package to stave off Greek default. No doubt, the deal enhances the probability that Greece will be able to squeak past its major debt refunding on March 20. This is good news regarding the prospect for immediate financial strains. However, near-term challenges abound, including convincing investors to share enough losses to make the fiscal arithmetic square, bank depositors in Europe that there funds remain safe, and politicians in the richer countries that directing more resources to keep the euro project afloat is still a wise decision.

Even after navigating the near-term shoals, the long-term outlook for Hellenic fiscal sustainability remains doubtful.

Recognize that “success” requires the government work down its debt relative to nominal income from the current lofty level of around 160 percent to 120.5 percent by 2020. (By the way, the false precision in that goal, forecasting a concept that has proved so slippery as the Greek debt burden to the 1/2 percentage point nine years out, shows that there is an unreality about the exercise.) The consolidation of the government sector, the reduction in benefits, and toughened tax collection efforts will almost surely extend the ongoing Greek contraction. Such declines in income will create serious headwinds in making meaningful progress in deficit reduction, a point we made about two years ago in the Washington Post. Moreover, if the Greek government ever gets to that long-run goal, work by Carmen and Ken Rogoff has shown that debt loads even lower than that have been associated with markedly slower growth in income. Thus, the rescue offers Greece the opportunity for an extended struggle to settle for slow economic growth for an extended period. This debt crisis is not over...

Dmitri Vayanos, professor of finance at the London School of Economics:

While the bailout plan takes care of Greece’s funding needs in the short run and puts Greek banks on a sounder footing, it does not offer a full solution to Greece’s problems. The solution is a comprehensive programme of deep structural reforms. If these reforms do not take place, Greece is bound to default in the future. I am quite concerned by this possibility. Greece does not have the capacity to perform many of the reforms — partly because many of its politicians do not believe in them or stand to lose from them personally, and partly because the capacity of Greece’s already inefficient public administration has further been weakened by the austerity cuts. Moreover, Greece’s foreign partners have mainly focused so far in the fiscal targets that Greece must meet, and have not given enough emphasis on the deeper institutional reforms that Greece needs to exit the crisis.

Henry Farrell, associate professor of political science at George Washington University:

The bailout will work — if by “working” you mean putting off the really hard decisions for another month or two. It doesn’t solve the fundamental economic and political problems of the eurozone, nor is it designed to. Not even its designers think that it will solve the economic problem. It is based on ludicrously optimistic assumptions, which were clearly chosen in order to produce the desired outcome. The political problem is only getting worse. As I and John Quiggin predicted in Foreign Affairs last year, imposed austerity is souring politics between Eurozone member countries, and encouraging extremists to come to the fore. Europe needs to reinvent its democratic model if it is going to create any genuine economic government. Yet each concrete step that it takes to limit democracy moves it further away from doing this. If whispers are to be believed, German politicians are far more aware of this dilemma than they let on in public, but they obviously have not figured out any way to solve it

Nicolas Veron, senior fellow at Bruegel, a Brussels-based think tank:

This agreement does not set Greece on a sustainable track, and more pain is sure to come down the road — both in terms of Greece temporarily losing its sovereignty, and in terms of further debt restructuring which from now has to involve the official creditors, namely Eurozone taxpayers. The agreement is however much better than the alternative, which would have been a disorderly Greek default with possibly disruptive consequences for the global financial system. Therefore it has to be considered a success, but by no means a resolution of the crisis, either for Greece or for the Eurozone as a whole.

Mohammed el-Erian, co-chief executive of Pimco:

After several technical iterations and too many rounds of political threats and accusations, the three parties to a Greek solution finally agreed on yet another bailout. But they did so for negative rather than positive reasons and, accordingly, this agreement is likely to follow its predecessors and fall apart in the weeks ahead.

The latest agreement, while better designed in parts, leaves Greece’s basic problem unresolved: The country still faces the prospects of too much debt and way too little growth. As a result, this is yet another attempt to sustain the unsustainable.

I suspect that the three parties to the agreement — representatives of Greece, of its official creditors and of private creditors — know this. It is one reason why no single party, or the three collectively, feel they sufficiently “own” the approach being pursued. So don’t expect them to go out of their way again the minute it hits a bump on the road to full implementation, as inevitably it will.

Despite all this, none of the three parties wishes to go down in history as having forced a change in approach, even though this could lead to a more sustainable path. They would rather have this forced on them by “unfortunate circumstances.” Why? Because such a change involves a high probability of a disorderly debt default in an advanced European country, as well as the possibility of an exit from the Eurozone.

All this would be academic — or even desirable as it gives the rest of Europe time to build financial and economic defenses -- if it weren’t for real and durable costs.

The Greek people, and especially those in the middle and lower income classes that are least able to protect themselves, will suffer as they are asked to sacrifice again via austerity without the prospects of benefits down the road. The credibility of the ECB and IMF, two monetary institutions that are important for the wellbeing of the global economy, will take another hit, as will their legitimacy. And the political unity of Europe will be put under even more pressure as the blame game intensifies.

The three parties may have come to an agreement. But its impact will fall short of what is needed. Further thoughts here.

Richard Portes, economist at London Business School:

The bailout will fail even if debt restructuring attracts sufficient creditor support now and CDS are not triggered (both uncertain). Debt reduction seriously inadequate. Greece will need more official support, sooner rather than later. The politics are poisonous too, in Greece and in eurozone. Better a really deep but orderly debt reduction and no more official support except to recapitalise Greek banks and make it feasible to stay in euro. Then they are on their own, with ‘ownership’ of their own program, and maybe the shock will catalyse the major institutional reforms needed to restore the Greek economy, whose problems are microeconomic, social and political, not the exchange rate or monetary policy.

Barry Eichengreen, economist at the University of California Berkeley:

It won’t work. There is absolutely no margin for error: everything has to go perfectly in order for the scenario sketched in the agreement to materialize. And we know that absolutely everything going perfectly is not how things work in the real world. At most, European leaders have bought a couple of quarters to contemplate what comes next. But, as we’ve learned, that’s the nature of the European political process.

Simon Johnson, co-author of “White House Burning” (to be published in April):

The Greek debt restructuring is very unlikely to work, in the sense that further trouble lies ahead — including probably another restructuring of their national debt. The main problem is that it will be very difficult for Greece to grow under the agreed program — debt remains very high, taxes will be high and distortive, emigration will be substantial, and there will not be the kind of export boom that often helps countries snap back from deep crises.

The designers of this so-called “bailout” are European politicians who are desperately trying to deflect scrutiny from the broader mismanagement of the Eurozone – including the looming problems in Portugal, Ireland, and Italy. They may have bought themselves some time, but how much? The Obama administration must be feeling very nervous. The European crisis will likely soon worsen – but does “soon” mean before or after November 6, 2012?

Desmond Lachman, American Enterprise Institute fellow:

At best the IMF-EU bailout package will stave off a disorderly Greek default for three to six months. It is fanciful to think that the application of the same failed policy prescription of hair shirt fiscal austerity in a currency union will work any better this time around than it did over the past two years. The limits will soon be reached as to how much further pain Greece can withstand and how much longer Greece’s body politic can continue with economic policies that are literally driving the Greek economy into the ground. It would seem highly probable that Greece will seek a new policy direction after its next election which will probably occur in April. And the IMF and EU will find out how little they got for the EUR 90 billion they spent in their futile effort to prevent the inevitable disorderly default and Greek exit from the Euro.

Ezra Klein, Suzy Khimm, Sarah Kliff and Brad Plumer contributed to this post.