A Deal Europe Can’t Refuse

Greece’s leftist party, Syriza, swept into power on Jan. 26, buoyed by fiery rhetoric from its leader, Alexis Tsipras, who promised to renegotiate the terms of Greece’s 2010-12 debt bailouts. Those deals with creditors saved Greece from default and free fall during the global economic crisis, but left the country crushed under huge loan obligations and committed to wrenching cuts in public spending.

Over the past four years, the austerity bailout has been terrible for Greece: shrinking gross domestic product by almost 20 percent, trapping more than a quarter of the population in unemployment and pushing debt as a share of G.D.P. to 175 percent (from a pre-crisis level of 109 percent).

Greece’s new prime minister now appears to be on a collision course with the European Central Bank, the European Commission and the International Monetary Fund — the troika, as it’s commonly called, that together holds roughly 80 percent of Greek sovereign debt. If Mr. Tsipras and the troika can’t reach a deal, Greece could default or lose access to the bank liquidity currently greasing its economy.

This could in turn precipitate a rapid exit from the eurozone and the certainty of even worse suffering for Greek citizens, not to mention contagious instability across the European Union, especially in heavily indebted Italy and Spain.

There is an alternative — a way for Mario Draghi, the head of the E.C.B., and Christine Lagarde, the I.M.F. chief, to save the Greek economy from its tailspin, stabilize the eurozone and lay the foundations for inclusive growth across the region. The E.C.B. and I.M.F. should swap the Greek debt they hold, about 52 billion euros (or $59 billion), for interest-free debt that will come due only once Greece’s economy gets back on track.

These so-called zero coupon bonds would have the same face value as current Greek debt — thus nominally protecting the principal originally lent by creditors — but would not impose interest payments on Greece as it struggles to recover. More important, debt repayment obligations should not kick in until Greece’s economy shows signs of life. Reasonable targets would be a return to healthy growth, the unemployment rate falling to below 12 percent, and a reduction of the now crushing debt-to-G.D.P. ratio to a sustainable 40 percent (which is closer to European norms).

The E.C.B. should also buy the debt currently held by France, Germany and other major European Union creditors, so that Greece can get the same deal across the board. A debt swap would dovetail with the E.C.B.’s quantitative easing program, which plans to buy bonds across Europe to put more money into circulation and jump-start the stagnant economy.

The troika also needs to compromise on the fiscal terms of the Greek bailout program. Some of the loan conditions imposed, like major improvements in tax revenue collection to close loopholes and combat corruption, are tough medicine but good for Greece in the long term. While creditors should stick to their guns on these kinds of structural reforms, the slash-and-burn approach to public spending must end. Greece is now experiencing a tragedy of blighted lives, with joblessness, poverty and hunger worse today than at any time since the 1930s.

A key to economic growth is investment, especially investment in health and education. Austerity measures that cut basic social safety nets not only cause widespread deprivation, but they also destroy any chance for economic growth.

Another linchpin of economic recovery is consumer demand: When wages plummet and unemployment skyrockets, economies go into a death spiral of shrinking demand. A key lesson from the ’30s was that striving to balance the government’s books on the back of job cuts only prolongs a depression.

Like Germany after World War I, Greece has been choked by its obligations to foreign creditors. Children go hungry so that banks can tell their investors they’ve refused to take a haircut. It’s no wonder that Greek citizens have finally risen up in fury, saying enough is enough.

Under the current austerity measures and repayment obligations, Greece will never be able to get its economy back on its feet. But if Mr. Draghi and Ms. Lagarde show leadership and meet Mr. Tsipras halfway, a win-win-win is possible. Reasonable repayment terms for Greece, pegged to a real recovery, would end the human misery and spur economic growth — with long-run benefits that would spill across the eurozone.

Terra Lawson-Remer, a fellow at the Brookings Institution, is a co-author of Fulfilling Social and Economic Rights.

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