Since assuming power this January, the distinguishing feature of Greece’s newly elected Syriza government has been its lack of a coherent economic plan. Instead, it has based policy on the desire to fulfill unrealistic electoral campaign promises and on the wishful hope that its European partners would continue to provide the necessary financing. This has led to a marked loss of both domestic and international confidence that has revived fears of a renewed Greek economic recession. It has also resulted in a marked deterioration in Greece’s public finances that has seriously impaired its ability to honor its international and domestic commitments.
Having missed out on a plan A, one has to hope that the Syriza government will quickly formulate a plan B that might limit any further damage to the Greek economy. In particular, one must hope that it will weigh very carefully the relative merits of the three basic options that now confront it. One must also hope that it will immediately disabuse itself from any notion that Greece’s European partners will soon blink in the negotiations and provide Greece additional financing without requiring basic policy reform. Greece’s European partners now seem more determined than ever to avoid moral hazard in the rest of Europe’s periphery and they now believe that Europe is in a better position to weather a Greek exit than it was in 2012.
The Syriza government’s first option would be to continue on its present path of responding to events as they occur without trying to mold them. This will almost certainly lead to a deepening in the Greek crisis as its creditors withhold further funding. That in turn would both force Greece to default on its International Monetary Fund (IMF) and European Central Bank (ECB) debt commitments as well as require Greece to impose damaging capital controls on its banks. In time, it would also force Greece to issue a parallel currency that in the end would lead to a disorderly Greek exit from the euro.
Full text of this article can be found at TheHill.com.
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