Mohamed Mondays - The Best from Greece

Very few of us like to be confronted with unpleasant choices.

If we are, we will tend to delay a decision. And if forced to make one, we will likely opt for the choice that, in our minds at least, seems less disruptive upfront — even if we know it is likely to involve discomfort down the road.

This simple human analogy is critical in understanding why Europe’s increasingly ugly debt crisis refuses to go away. It sheds light on the choices made up to now; and it speaks to why an increasingly incoherent policy response will likely end up in tears for Greece and potentially other European economies and institutions.

Let us wind the clock back to just over a year ago when Europe first bailed out Greece, a country no longer able to pay its bills. Together with two monetary institutions — the European Central Bank and the International Monetary Fund — European politicians faced unpleasant choices and had to respond. But rather than decisively addressing the problem, they essentially opted to kick the can down the road.

There were, and still are two main reasons for Greece’s predicament: The country borrowed way too much; and it failed to grow its economy on a sustained basis. This lethal combination was amplified by weak public administration.

Yet the rescue of Greece involved making new loans to the country and was asking for a very ambitious fiscal adjustment effort. Neither the size of the debt nor growth reinvigoration were properly addressed.

I suspect this choice was not driven by a strong conviction that the approach would work. Rather, decision makers feared the complexity of the alternative which involved opting for a pre-emptive, and hopefully orderly debt restructuring, and placing much greater emphasis on structural reforms.

A year later, Greece is still in the financial intensive care unit, and needs renewed urgent attention by the “troika” of doctors — from the European Commission, ECB and the IMF.

Regrettably, the country’s condition is even more serious now, with every single one of its vitals worse than projected by these same doctors a year ago.

The economy has contracted by more than programmed: unemployment is higher, debt and deficit dynamics are worse and, with market risks measures of spreads at even more alarming levels, the country is further away from restoring access to normal capital market financing.

Understandably, the Greek government is under intense pressure at home from a population that is being asked to sacrifice tremendously but sees virtually no improvements on the horizon. Coordination among lenders is becoming more difficult as two related concerns fuel ever-growing bickering: what has happened to all the money that has already been disbursed? And, why are so many dubious liabilities being transferred to taxpayers from private creditors, who were paid an interest rate premium to take an informed risk?

No wonder Europe’s approach to its debt crisis is losing credibility. In the process, the institutional integrity of some key institutions is being undermined.

This is particularly true for the ECB which now finds its balance sheet saddled with billions of Euros of Greek bonds. Some were purchased in a failed attempt to counter the surge in Greece’s risk spreads; others are related to repo operations that have kept afloat an essentially bankrupt Greek banking system

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When you think of it, none of this should really come as a surprise to Europe’s decision makers. At its root, the approach to solving Greece’s excessive debt problem was to pile new debt on top of old debt; and the accompanying medication served more to reduce growth than improve the structural drivers of a sustained economy expansion.

Despite this obvious diagnosis, the doctors are essentially at it again; and the patient, already weakened, is forced to commit to yet greater sacrifices. Thus, Greece will get more debt-creating financing in exchange for even larger fiscal austerity.

However, it is not entirely all d

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