|The Straits Times, Published on Feb 02, 2015
Austerity medicine a bitter pill
Greeks who voted for Prime Minister Alexis Tsipras might see him as the deus ex machina - the one who can deliver them from an insoluble difficulty of their own creation. That would be not just a desperate hope, but also a deluded one. Mr Tsipras and his radical left associates lack both government experience and, more importantly, a trump card to swiftly extricate the nation from its debt mire. His vows to abandon strict austerity measures imposed by Greece's lenders and ease his people's suffering are seen as "promises he cannot keep and the country cannot afford" by hard-nosed Europeans like Bundesbank president Jens Weidmann.
Here's the rub: Reneging on the terms of the €240 billion bailout would mean instant bankruptcy. And dropping the euro for its own national currency would wipe out the savings of Greeks, as the new currency would sink like a stone.
The implied threat of a debtor nation to leave the euro zone is no longer petrifying. Financial firewalls are now in place to prevent debt contagion and fears have eased that Europe is unable to resolve its crisis. On the contrary, the self-interests of members will prevail ultimately and Europe will emerge "with stronger institutions and far better economic prospects for the future", as some analysts, like Peterson Institute for International Economics director C. Fred Bergsten, believe. In the meantime, the EU will be tested by populist dissent, as seen in Greece, when Portugal and Spain go to the polls later this year, with support for leftist anti-establishment movements running high.
It is clear to German Chancellor Angela Merkel, Europe's de facto leader, that going soft on debtors would create a monstrous moral hazard. Yet, she must create enough wriggle room for leaders like Mr Tsipras to avoid "a mutually destructive clash" with creditors, as he puts it, while not "disappointing" his electorate. Dr Merkel should also show flexibility by revisiting the assumptions of the International Monetary Fund, European Central Bank and European Commission when bailing out Greece. Paying down debt while tightening one's belt works only if there is recovery. In Greece, austerity led to a full-blown depression which, in turn, aggravated its debt woes. Unemployment is severe - almost 60 per cent among youth - and it might take a generation to resume normal levels of economic activity.
Mr Tsipras can help his own cause by showing respect for the rules of the game when negotiating the restructuring of debt. He should also demonstrate resolve in tackling the corruption, patronage, nepotism and waste that helped to rack up a mountain of debt over three decades. Greeks must be realistic about just how much of this debt creditors can bear to keep cancelling.
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Austerity medicine a bitter pill - Opinion Eye On The World ST Editorial - The Straits Times