Experts react to Europe’s bailout package for Greece

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...

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Vincent R.
Reinhart

What's new on AEI

AEI Election Watch 2014: What will happen and why it matters
image A nation divided by marriage
image Teaching reform
image Socialist party pushing $20 minimum wage defends $13-an-hour job listing
AEI on Facebook
Events Calendar
  • 20
    MON
  • 21
    TUE
  • 22
    WED
  • 23
    THU
  • 24
    FRI
Monday, October 20, 2014 | 2:00 p.m. – 3:30 p.m.
Warfare beneath the waves: The undersea domain in Asia

We welcome you to join us for a panel discussion of the undersea military competition occurring in Asia and what it means for the United States and its allies.

Tuesday, October 21, 2014 | 8:30 a.m. – 10:00 a.m.
AEI Election Watch 2014: What will happen and why it matters

AEI’s Election Watch is back! Please join us for two sessions of the longest-running election program in Washington, DC. 

Wednesday, October 22, 2014 | 1:00 p.m. – 2:30 p.m.
What now for the Common Core?

We welcome you to join us at AEI for a discussion of what’s next for the Common Core.

Thursday, October 23, 2014 | 10:00 a.m. – 11:00 a.m.
Brazil’s presidential election: Real challenges, real choices

Please join AEI for a discussion examining each candidate’s platform and prospects for victory and the impact that a possible shift toward free-market policies in Brazil might have on South America as a whole.

No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.