The deal struck last week between Greece and its euro-zone creditors is business as usual — and that’s not a good thing. This protracted game of “extend and pretend” serves nobody’s long-term interests: not those of the Greek government, the International Monetary Fund or, most of all, the people of Greece.
Euro-zone finance ministers have unlocked a payment of 8.5 billion euros ($9.5 billion), the newest installment of a rescue plan worth 86 billion euros. This will let Athens make debt repayments of 7 billion euros that fall due next month. But there’s still no agreement on how to get Greece’s debt burden under control. The IMF had previously insisted that this question should be settled now.
It was right, and it should have stuck to that position. The new agreement fails to recognize what everybody knows: that Greece’s debt is unsustainable on the current terms.
In an effort to pretend otherwise, Athens has promised primary budget surpluses (meaning net of interest payments) of 3.5 percent of gross domestic product until 2022, and then of “above but close to 2 percent” until 2060. True, the Greek economy achieved a better-than-expected primary surplus last year. As the European recovery gathers pace, there could be more good fiscal news. But the idea that Greece can maintain this degree of fiscal control for the next 40 years is ridiculous.
For instance, at some point during the next four decades, there might be another recession. Stranger things have happened.
The blow to the credibility of the IMF could prove to be lasting damage. The fund points to its refusal to disburse money at this point as proof it’s serious about debt relief. Yet it remains a partner in a project that, by its own analysis, is bound to fail. It should have said, enough. Europe doesn’t need the fund’s money or expertise. Governments only sought the fund’s seal of approval — and should have been denied it.
Granted, the euro zone has done a lot to support Greece since its fiscal crisis began. Athens has been granted no fewer three rescue packages, worth 326 billion euros in total. The euro zone has allowed generous grace periods for official loans, extended their maturities and lowered the interest rate. As a result, Greece’s debt repayments are actually quite manageable for now.
But this won’t last. Grace periods come to an end. As interest rates creep up, Greece’s debt repayments will rise too. The perpetual primary surpluses creditors are demanding will squeeze the economy so hard that they’ll be self-defeating even in narrow fiscal terms.
All of this is well understood. Greece needs a new deal, offering debt relief in exchange for progress on reform. Maybe the EU will be willing to agree to this next year, when the existing program expires. But there was no good reason for failing to propose it now.