Greek Deal Leaves Europe on the Road to Disaster

I'm not much impressed with the new Greek "rescue", as I explain in a column for Bloomberg View.

If Europe's new plan for Greece succeeds, nobody will be more surprised than the politicians who designed it. At best, the arrangement is a holding action, one that fails yet again to deal with the much larger confidence crisis facing the euro area...

Even if it sticks, the designers don't sound confident it will work. An official analysis leaked to the Financial Times discusses a "tailored downside scenario," which, to many observers, looks more like a plausible central case.

In this projection, Greece postpones the structural changes -- such as a lowering of wages -- needed to make its economy competitive. Fiscal adjustment and privatization are delayed. The government's dependence on official loans grows, and its debt burden surges higher. The debt trajectory would be "extremely sensitive to program delays," the officials conclude, "suggesting that the program could be accident prone, and calling into question sustainability."

Sounds like business as usual. All through this crisis, the EU has chosen to keep muddling through, never doing quite enough to resolve the problem, infusing each round of subsequent crisis-management with high political drama. Advocates of this method argue, with a particle of justification, that it's working. Unilateral default has been avoided and pressure has been brought to bear on Greece and others to push ahead with economic reforms that were long overdue.

If there is some intelligent principle behind this approach, rather than mere flailing incompetence, it would sound like this: "Let's build this manageable problem up into a crisis capable of vast destruction that we might be unable to control. That will create the fear needed to force some real improvements in economic policy."

I submit that this is no way to run a railroad. You can read the whole column here. And here is the leaked Debt Sustainability Analysis for Greece.

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