Greece, a Financial Zombie State

By THE EDITORIAL BOARDJUNE 12, 2015

The New  York Times

Greece and the other countries in the eurozone are once again at an impasse days ahead of a crucial deadline. If the two sides do not reach an agreement on how to extend a 240 billion euro ($270 billion) loan program beyond June 30, Greece will most likely default on its debts and would probably be forced to abandon the euro.

European leaders have been in a similar situation before and have managed to strike a deal to avoid default and Greek exit from the euro. But those agreements have only put off the moment of reckoning without resolving Greece’s fundamental economic and financial problems. To break the cycle, European officials need to produce a realistic plan to revive the devastated Greek economy and put the government’s shaky finances in order.

Here is what such a plan would look like: The 18 other members of the eurozone would agree to forgive or delay the repayment of some of Greece’s crushing debt, which is equal to 177 percent of gross domestic product. In exchange, the government of Prime Minister Alexis Tsipras must agree to changes that would increase tax collection, make the government more efficient and to boost economic growth by making it easier to start new businesses.

For any arrangement to work, the leaders of Germany and other eurozone nations have to be willing to lose some of the money they put up to repay Greece’s private lenders, many of whom were banks and investment firms in their own countries. But if the eurozone does not make this relatively small sacrifice now, it will suffer greater losses if Greece defaults and exits from the euro. That result, aside from increasing European losses, would undermine confidence in the common currency in future crises. And a default and euro exit would deal a devastating blow to the economy and financial system of Greece.

To get better terms on repaying the country’s debt, Mr. Tsipras would also have to make concessions, which would not go down well with his left-wing party, Syriza. For example, he needs to end early-retirement options that are a drain on the public pension system. His government will have to do a lot more to crack down on tax evasion and end cumbersome business and licensing regulations that create perfect opportunities for corruption. Many eurozone leaders don’t trust Mr. Tsipras’s government to carry out such changes, and he and his team haven’t helped with their posturing, including demanding that Germany pay reparations for World War II.

But officials in the rest of the eurozone have made the Greek crisis worse since the first loan was made in 2010, by demanding senseless austerity policies that have inflicted suffering on individuals, contracted the economy and pushed the unemployment rate in Greece to 25 percent with about half of its young people looking for work. Even now, European leaders want Mr. Tsipras to further cut the already reduced pension benefits retired public employees now receive.

Whether Greece will have to go on in this zombie financial condition will also depend on the International Monetary Fund and the European Central Bank, both of which have lent money to Greece. I.M.F. officials have been privately pressing the eurozone for debt relief for Greece, but the fund’s managing director, Christine Lagarde, should do more to convince European leaders that the country cannot succeed unless there are major changes to the loan program. The president of the E.C.B., Mario Draghi, recently said “growth with social fairness and fiscal sustainability” had to be a part of any deal between the eurozone and Greece.

More than five years have passed since European officials reached the first loan agreement with Greece. Yet instead of moving toward recovery, the country has been trapped in an economic calamity with no end in sight.

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http://www.nytimes.com/2015/06/12/opinion/greece-a-financial-zombie-state.html