Kicking the can - The Best from Greece

Greece has made it through its latest near-meltdown. But the solution patched together last week — more European bailout money for more Greek austerity — only buys some time without offering any realistic hope of recovery.

Athens agreed to impose a new $9 billion round of tax increases and spending cuts and speed up nearly $75 billion in promised privatizations. Europe and the International Monetary Fund, which had threatened to cut off financing after the government missed its deficit-reduction targets, will continue paying a $160 billion bailout package and likely provide as much as $86 billion more when that runs out.

Greece needs to reform its sputtering economy and bring discipline to its fiscal accounting. But a new round of tightening just now could deepen the recession and further shrink the tax base, making it even harder for the government to cut its deficit. Greece has no chance of reviving its economy — or paying off its bills — if it has to keep paying full interest and principal on a debt burden that is now more than 140 percent of gross domestic product and rising. Debt relief, or, to use the bankers’ euphemism, restructuring, will be needed. Debts must be written down, payments deferred and interest rates reduced.

Prime Minister George Papandreou let political resistance and bureaucratic inertia stall promised privatization efforts. He has now committed to clearing away those obstacles. While Mr. Papandreou has begun telling his people unpopular truths about necessary sacrifices and painful reforms, other European leaders are failing to do the same about the need to restructure Greece’s debt.

They are worried about a voter backlash and that other countries may demand similar relief. Denial won’t make the problem go away, and delay will only make the required debt relief much larger.

Europe’s central bank president, Jean-Claude Trichet, has been one of the most vocal opponents of writing down existing debt. Even he recognizes that bold actions are needed. Last week, he suggested creating a European finance ministry with power to supervise spending by all countries using the euro.

Euro-zone governments are protective of their sovereignty and fiscal illusions. But the European Union is fast reaching the point where it will have to choose between members yielding some fiscal sovereignty or seeing some countries forced out of the euro zone. The former would be hard. The latter would be catastrophic, and not just for debtor countries. Exporters and banks in Europe’s most successful economies, Germany’s included, would be gravely threatened by an unraveling of the euro zone.

Europe’s leaders also need to tell the truth about their struggling banks, whacked by housing busts in Ireland and Spain and wobbly Greek loans. This is a continental problem demanding a continental solution — rigorous new stress tests followed by recapitalization of weak institutions. In exchange for help, banks must be required to accept write-downs of Greek and Irish debt so those economies can grow their way out of their crises.

It is past time for Europe’s leaders to acknowledge the depth and breadth of the euro-zone crisis and the need for real solutions.
A version of this editorial appeared in print on June 7, 2011, on page A30 of the New York edition with the headline: Kicking the Can: Without debt relief, Greece can’t grow and the crisis won’t end.

http://www.nytimes.com/2011/06/07/opinion/07tue2.html

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