NEW YORK — Some in Europe – especially in Germany – seem nonchalant about a Greek exit from the eurozone. The market has they claim already ‘priced in’ such a rupture. Some even suggest that it would be good for the monetary union. I believe that such views significantly underestimate both the current and future risks involved. A similar degree of complacency was evident in the United States before the collapse of Lehman Brothers in September 2008.
European Union leaders continue to play a game of brinkmanship with the Greek government. Greece has met its creditors’ demands far more than halfway. Yet Germany and Greece’s other creditors continue to demand that the country sign on to a program that has proven to be a failure – and that few economists ever thought could would or should be implemented.
The swing in Greece’s fiscal position from a large primary deficit to a surplus was almost unprecedented, but the demand that the country achieve a primary surplus of 4.5 percent of GDP was unconscionable. Unfortunately at the time that the ‘troika’ — the European Commission, the European Central Bank and the International Monetary Fund — first included this irresponsible demand in the international financial program for Greece – the country’s authorities had no choice but to accede to it.
The folly of continuing to pursue this program is particularly acute now – given the 25 percent decline in GDP that Greece has endured since the beginning of the crisis. The troika badly misjudged the macroeconomic effects of the program that they imposed. According to their published forecasts they believed that by cutting wages and accepting other austerity measures – Greek exports would increase and the economy would quickly return to growth. They also believed that the first debt restructuring would lead to debt sustainability.
The troika’s forecasts have been wrong – and repeatedly so. And not by a little – but by an enormous amount. Greece’s voters were right to demand a change in course – and their government is right to refuse to sign on to a deeply flawed program.