An impossible gap to bridge in Greece

As Sunday’s “final” European deadline fast approaches for the Greek government to present a reasonable economic reform proposal to save the country from a euro exit, most commentary is focused on whether or not Greek Prime Minister Alexis Tsipras will indeed present such a proposal. While clearly relevant, such a focus overlooks an equally relevant question. Even if Tsipras does present a reasonable proposal, will he be able to implement it? This question would seem to be all the more pertinent after last weekend’s referendum indicated that an overwhelming majority of the Greek electorate was opposed to further fiscal austerity and structural economic reform.

{mosads}Last weekend’s overwhelming “no” vote can leave little doubt about the depth of Greek public anger about the country’s disastrous economic performance under International Monetary Fun (IMF) and EU tutelage. Over the past five years, the Greek economy has experienced an economic depression on the scale of that in the United States in the 1930s. Output has declined by 25 percent, unemployment has risen to over 25 percent and youth unemployment is now well over 50 percent.

For all of its many faults and its manifest degree of incompetence, Greece’s Syriza Party government has been right to assert that a large part of the blame for Greece’s economic collapse must be laid at the feet of the IMF and European Union’s poor economic policy prescription for the country. Specifically, the government has been correctly arguing that the excessive fiscal adjustment forced on Greece by the IMF and its European partners within a euro straitjacket — which precluded currency devaluation as an offset to budget belt-tightening — was bound to send the Greek economy into a downward spiral, as it indeed did.

Over the past five months, the Greek government has also been right to question the appropriateness of the IMF and EU continuing to advocate the very same policy prescription of budget belt-tightening and structural reform. If in the past such a policy approach singularly failed to put Greece on an economic growth, why should one think that it would now do so?

A major problem for Greece is that far from backing off from the call for continued budget austerity within a euro straitjacket, the IMF and EU are now calling for even more such austerity than they did before the referendum. They are doing so with the ostensible purpose of trying to put the country’s public finances back on track, since Greece’s public finances have been seriously compromised by the economy’s renewed downward tailspin. That tailspin turn has resulted from the government having been forced to shut the country’s banks and impose draconian capital controls in order to counter a bank run in an atmosphere of heightened uncertainty as to whether or not the country would remain in the euro.

With Greece’s banks closed now for almost two weeks, commerce has ground to a halt and the country’s all-important tourist sector has been adversely impacted. The renewed weakening in the economy is negatively impacting the government’s tax collections and has put the government in a position where it is literally running out of cash to pay wages and pensions.

The overwhelming “no” vote in Greece’s referendum was as clear a repudiation as one could get by the Greek electorate regarding further fiscal austerity. If the IMF and EU were to ask of Greece even more austerity than they did before the referendum because of the worse state of the Greek economy, Tsipras would face an insurmountable political problem at home. After having vigorously campaigned for a “no” vote as recently as last weekend, how could Tsipras possibly be expected to propose to the Greek parliament even more austerity measures than those that the electorate had so recently rejected? Surely that would only split Tsipras’s Syriza Party and provoke a renewed Greek political crisis.

The sad reality is that, politically, Greece is in no position to meet the budget and structural economic reform dictates of its creditors. To pretend otherwise is to engage in gross self-delusion. Rather than do so, the IMF and European Union should come to terms with the fact that Greece can no longer remain within its euro straitjacket. They should also now be carefully thinking about a plan B, which might help Greece execute an orderly euro exit and which might ring-fence the rest of the European economic periphery from any contagion emanating from such an exit.

Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.