Stretched too far

A week ago, senior European officials were worried about unchecked political developments in Greece. They gave reassurances that the fifth installment of aid to Greece would be released, and that a new bailout loan was under way. When the risk of collapse was no longer there, foreign officials came back with fresh warnings, but they are mostly bluffing. Even those who issue these warnings admit that the Greek crisis poses a huge systemic risk to the eurozone. As a result they are obliged, for their own good, to avert a Greek default.

That does not mean to say that Greece must exploit the situation to avoid fiscal reform. It does mean however that Greece is not totally without its bargaining chips, as the cheerleaders of the memorandum would have us believe. The government failed to negotiate the deal or meet its commitments. As a result, it tarnished its credibility at home and abroad.

Troika officials — from the European Commission, European Central Bank and the International Monetary Fund — were happy to see George Papandreou and Giorgos Papaconstantinou, then finance minister, accept their demands without too much fuss. At the same time, they were angry at their incompetence and inconsistency. But these were in fact two sides of the same coin.

The midterm fiscal plan does not lead to the creation of a primary surplus, which must be the goal. It will just sink the economy further into recession. A sustainable growth program has to combine the tidying up of public finances (which has to start from scratch), better use of the country?s dormant growth potential and a restructuring of Greece?s debt. It is obvious that the country?s debt is not serviceable unless there is a ?haircut.? If the eurozone wants to avoid that, for its own reasons, it should work to find an alternative solution. Solutions do exist; what does not exist is the political will to implement them. Caught up in contradictions, foreign officials are issuing warnings although the midterm plan is set to pass.

Greece is not the black sheep of the bloc. It is the weakest link in a weak chain. If Greece were to return to the drachma, the crisis would hit other weak links. Greece is on the front line, but it is not the front. It is vital that the Greek problem is tackled in a European context. Warnings, humiliation and punishment are only making matters worse. When you stretch things too far, some things get broken in the process.

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