“The chief culprit is Germany. All along, it has tried to have it every way- to back Greece, but to punish it for its mistakes; to support the Greek economy, but not to spend any money doing so; to treat this as just a Greek problem, when German banks and German citizens, who lend to Greece, stand to lose money too. German voters do not favor aiding Greece. But rather than explain to them why it is in Germany's interest, the chancellor, Angela Merkel, has run scared of upsetting them before a big regional election on May 9th.”
This is a flawed analysis. It fails to account for what would have happened had Germany just offered the funds promptly. Consider the situation a few weeks ago: Greek Finance Minister George Papaconstantinou attempted to allay investors' concern about Greek indebtedness by trumpeting a 3% cut in the deficit and the Euro region's vague “commitment” to offer 45 billion Euros in loans should funds be needed. Meanwhile, large numbers of Greeks took to the streets to protest such draconian thrift. But the harsh reality is that to lend money to a country with a shrinking economy, a deficit of over 10% of GDP, and a debt of over 115% of GDP would solve nothing. In a matter of months, if not days, investors would realize that Greece was still hurtling towards default. And then where would Europe be? They would be 45 billion Euros poorer and Greece would have an even bigger debt problem to deal with. And the political will to pay for yet another bailout would surely be much abated.
That Germany chose another path should not be written off as mere political political posturing. Rather, Germany demanded that Greece submit to an I.M.F. austerity program. Involving the IMF has two major advantages that greatly increase the probability of Greece avoiding default – though some sort of eventual restructuring will still be hard to avoid. The first advantage is that the I.M.F. has expertise in lending to distressed countries and designing austerity programs. The E.U.'s initial attempt to rescue Greece by itself suffered from a lack of coordination and clarity of purpose. The I.M.F., on the other hand, seems to know exactly what it is doing and how it is going to do it. The second advantage of bringing in the I.M.F. is that unlike European politicians, the organization is known for tough quantitative assessments of what is really needed to bring foundering countries back to fiscal self-sufficiency. It now appears that in conjunction with the IMF, Germany will demand a much more drastic 10% cut in Greece's deficit. If this can be accomplished without causing the economy to contract too severely, Greece might just be able to pay its debts. Surely a plan in which Greece's debt will not continue to explode is superior to a scheme that would merely delay and exacerbate the current fiscal crisis.
Yes, it is true that a consequence of delaying the Greek aid package was increased uncertainty and volatility in markets. But that is a cost worth bearing. By delaying the package, involving the I.M.F., and demanding serious deficit reduction, there is now some chance that Greece escapes economic catastrophe. Had Germany not delayed its package, Greece's fiscal situation would have continued to deteriorate, necessitating more bailouts and causing even greater uncertainty and volatility at a later date.
