Will A Deal Leave Greece in Ruins?
Any deal Greece strikes with its creditors may be a big step in Greece’s long delayed post-crisis recovery. But the direction it takes still won’t be clear. Will the road look like Spain’s, or Italy’s? It makes a big difference.
It still seems just possible that Greece and its creditors will come up with some settlement that avoids the country’s default on its maturing loans and allows it to remain a full member of the eurozone. The deal will more than likely be a variation on existing austerity terms, where the Greek government is forced to legislate some mix of higher taxes and lower spending as well as reform its pensions system and labor market.
What won’t be included is a restructuring of Greek debt, despite the Syriza government’s demands and the painful economic reality that Greece is vanishingly unlikely ever to repay a pile of obligations worth 180% of the country’s output.
The question then is to what degree will Greece implement any promises it makes and how much backsliding on its deficit will its eurozone partners be prepared to ignore.
The Spanish economy is growing again and unemployment is quickly shrinking, albeit from extraordinary levels, thanks in part to the Spanish government’s willingness to ignore fiscal targets and to keep running substantial deficits. Brussels more or less turned a blind eye to the Spanish government’s transgressions with the result that the economy is generating enough momentum that the deficit is shirking of its own accord.
Italy, on the other hand, has been relatively fiscally prudent. Italy’s budget deficit, adjusted for the economic cycle, will have averaged 0.7% of GDP during the past three years, including a forecast for 2015. Spain’s, by contrast will have averaged just under 2.5% of the country’s output.
But Italian self-restraint hasn’t been particularly helpful. The economy has slipped in and out of recession since the financial crisis and, overall, has been stagnant since the introduction of the euro in 1999. As a result, Italy’s debt load has crept steadily higher, to some 133% of GDP, against Spain’s 100%.
Will Italy revive anytime soon? If it doesn’t it could well find itself on the same road as Greece. And right now that looks like the one to economic perdition.
Source: WSJ – Will A Deal Leave Greece in Ruins?
