NO PAIN, no gain. That’s the lesson the world has had to learn in the wake of the 2008 financial crisis. Some countries, such as the UK and parts of western Europe, were quick to apply austerity measures and take much of the economic pain early in the hope of enjoying the gains later.
Others, such as the US, sought to defer some of the pain through unprecedented monetary and fiscal stimulus, but will surely have to grit their teeth for longer as a result.
A third category includes Greece, Spain, Portugal and Ireland, whose economic position was so bad and policy options so limited they did not have a choice — their pain began the moment investors lost confidence in the banks’ and states’ ability to repay their debt, and it seems set to continue.
Much of the media focus during the Greek debt crisis has been on the country’s ability to remain a member of the eurozone, when its productivity, deindustrialisation and tax compliance levels all point to the need for a far weaker currency. Indeed, in the event of a sovereign debt default, even that basic decision may have been taken out of Greece’s hands.
Yet the meeting of eurozone finance ministers that ended on Monday night may finally have provided a basis for Greek hopes that the pain will eventually end. Their agreement to release another tranche of aid and help Greece reduce its debt burden over the next eight years will not in itself put the country on a sustainable footing. In fact, critics of the deal who say it amounts to "kicking the can down the road again", are right.
But while the main outcome is to buy Greece more time to get its house in order, key compromises were made, at the urging of the International Monetary Fund. These, for the first time, open a potential path to full recovery.
The Greek people will still have to endure a lot more pain, but there are at last moves afoot to address the fundamental obstacles to growth that until now condemned them to lurching from crisis to crisis.
In addition to a €44bn aid package, several measures have been put in place to relieve Greece’s debt burden, which is forecast to hit 190% of gross domestic product (GDP) by next year if nothing is done.
The goal is now 124% of GDP by 2020, meant to be achieved through a combination of an interest rate cut on debt from the first bail-out package, a 10-year term deferral and interest reduction on the second bail-out package, a voluntary buyback of privately held debt at a discounted rate, and a waiver of profits accruing to European central banks from past bond buybacks in the secondary market.
It is debatable whether the goal is achievable in this manner, especially since the quid pro quo from Greece’s side is additional spending cutbacks and other austerity measures that will almost certainly see the country’s economy shrink again next year.
The Organisation for Economic Co-operation and Development, which represents the world’s advanced economies, said on Tuesday it had slashed its growth forecast for member states to 1.4% next year and warned of a double-dip recession in the eurozone.
That does not augur well for Greece’s economic recovery, which means the only way to cut the debt burden to a sustainable level will be to write off loans aggressively. This option has been avoided up to now for two main reasons: to avoid sending the message to Greek politicians that policy reforms and spending cutbacks were unnecessary, and because the taxpayers in creditor countries such as Germany were in no mood to bail out profligate southern European states.
However, with Greece having now done its bit by inflicting severe pain on itself at considerable political risk, and the German election only a matter of months away, a meaningful debt write-off is surely the essential next step.