ECON WITH NEDA: New agreement insufficient resolution for Greece

By: Neda Ghomeshi / Opinion Editor

European political leaders and large banks reached an agreement on Oct. 27 to write down 50 percent of Greece’s sovereign debt — a move that will forestall a default by Greece; however, it will be insufficient in the long term.

Neda Ghomeshi / Opinion Editor

Even though a representative of Europe’s banks has agreed to the principle of writing down the value of Greek debt by half, negotiations with individual investors will take several months to complete. By then, Greece’s struggling economy will be even deeper in the hole, increasing hesitation about its capacity to service its debt burden.

According to The New York Times, “Investors cheered Europe’s broad agreement to address its sovereign debt crisis, choosing to celebrate the fact that the Europeans finally agreed on something.” Throughout all of this celebration, the crucial question if the plan is going to be effective was ignored. Basically, these efforts are addressing the issue, but not solving them. Greece’s economic crisis will continue to linger.

“All of this is putting a bandage over the wound…I suspect we’ll still be talking about this next year and the year after,” said Howard Archer, chief European economist at IHS Global Insight. Archer’s perspective is spot-on. This so-called resolution does not resolve anything.

During an economic crisis, Europe’s options differ from the those of the United States.  Although Europe has a unified currency and independent central bank, it is not like the Federal Reserve. The Fed can supply unlimited emergency funds to governments and banks that need them. Europe’s approach—insistence on imposing austerity in exchange for bailouts—is not going to regenerate growth, especially not in Greece.

In a The New York Times editorial, this issue is carefully and accurately summarized: “Greece is nowhere near out of the woods and won’t be for years to come. There is a lot that it must do for itself.”

Europe consistently advises fiscal austerity, which will not solve Greece’s current crisis. It will only hinder Greece’s growth and further regress its economy.

Fitch Ratings became the first ratings agency to speak out on the European Union’s plans to deal with its debt crisis. “Greece would still have a large amount of debt outstanding, its growth prospects are weak and its willingness to implement structural reforms may dissipate,” Fitch said.

Greece has been living beyond its means, and its rising level of debt has placed a huge strain on the country’s economy, leaving it unable to cover the remaining 50 percent of its debt. California State University economist Sung Won Sohn predicted that the crisis is likely to repeat itself, saying Greece would spend more than Europe has allowed and will be in danger of default.

“Econ with Neda” is an economics op-ed column that runs every other Monday.