Democracy is about real choices. But throughout their country’s crisis, the Greek people have been deprived of them. For this, the European Union and especially the International Monetary Fund (IMF) bear considerable responsibility.
Greece was offered two stark choices: Leave the eurozone without financing, or remain and receive support at the price of further austerity. But Greece should have been offered a third option: Leave the eurozone but with generous financing.
This option should have been put on the table, recognising that Greece has broader political reasons for staying within the eurozone. Although exiting the monetary union would have yielded considerable benefits, “Grexit” would have entailed sizeable costs as well.
The benefits would have included a massive devaluation, which would have restored some dynamism to what was once a fast-growing economy. But the costs were terrifying. The government would have had to default, the banks would have been ruined and both would have struggled for years to regain the trust of financial markets. As a result, interest rates would have remained high for a long time to come, impeding efforts to restore growth. Is it any wonder that the Greek government shrank from this horror and chose the “safe” option of austerity?
But this option may not be safe at all. It is in fact, to quote T S Eliot, that “awful daring of a moment’s surrender…” Greece will now need to grind away at austerity, hoping that in some distant future, “internal devaluation” — that is, wage and price deflation — will help to spark a recovery.
Only the IMF could have offered the third option of an orderly exit. Greece should have been told that it could reap the benefits of devaluation, while the international community would act to minimise the attendant costs. The precise terms of Grexit — agreed by the troika (the IMF, the European Commission and the European Central Bank) and Greek authorities — surely would have included a negotiated reduction in Greece’s debts as well as a strategy for recapitalising the banking system in order minimise uncertainty, pain and disruption.
Still, the costs would have been sizeable, so the IMF would have needed to offer generous financing, covering the country’s import requirements for, say, two years while providing the liquidity to manage the transition to a new currency. Of course, this would have increased the IMF’s already-large exposure to Greece; but this would have been a worthwhile trade-off, because it would have served a strategy that would have had a much better chance of success.
But is there any strategy that could have succeeded in restoring the Greek economy? After all, under any scenario, Greece will need to run a primary surplus and undertake structural reforms to transform its economy. And many insist that this will not happen because Greece simply refuses to change.
And yet, such assessments overlook the record of the past few years, during which successive governments have taken some fairly radical measures to strengthen Greece’s fiscal position and scale back the public payroll. Moreover, the sceptics overlook the fact that incentives to carry out structural reforms are partly endogenous. After all, without devaluation and the prospect of debt relief, reform merely spells more short-term pain, not less.
The reason why an assisted Grexit was never offered seems clear: Greece’s European creditors were vehemently opposed to the idea. But it is not clear that the IMF should have placed great weight on these concerns.
Back in 2010, creditor countries were concerned about contagion to the rest of the eurozone. If Grexit had succeeded, the entire monetary union would have come under threat because investors would have wondered whether some of the eurozone’s other highly indebted countries would have followed Greece’s lead.
But this risk is actually another argument in favour of providing Greece with the option of leaving. There is something deeply unappealing about yoking countries together when being unyoked is more advantageous.
More recently, creditor countries have been concerned about the financial costs to member governments that have lent to Greece. But Latin America in the 1980s showed that creditor countries stand a better chance of being repaid (in expected-value terms) when the debtor countries are actually able to grow.
In short, the IMF should not have made Europe’s concerns, about contagion or debt repayment, decisive in its decision-making. Instead, it should have publicly pushed for the third option, which would have been a watershed, for it would have signalled that the IMF will not be driven by its powerful members to acquiesce in bad policies. Indeed, it would have afforded the fund an opportunity to atone for its complicity in the creditor-driven, austerity-addled misery to which Greeks have been subject for the last five years.
Above all, it would have enabled the IMF to move beyond being the instrument of status quo powers — the US and Europe. From an Asian perspective, by defying its European shareholders, the IMF would have gone a long way toward heralding the emergence of a new institution: a truly international monetary fund, in place of today’s Euro-Atlantic Monetary Fund.
All is not lost. If the current strategy fails, the third option — assisted Grexit — remains available. The IMF should plan for it. The Greek people deserve some real choices in the near future. — Project Syndicate
Arvind Subramanian is chief economic adviser to India’s finance ministry
This article first appeared in Opinion, digitaledge Weekly, on August 24 - 30, 2015.