Is There Any Solution To The Greek Problem?

Posted on March 28, 2015

Greece-Solution

Potential solutions to the Greek crisis lie outside the framework of current negotiations and the current inflexible rules.

This article was first published in the Huffington Post and in Het Financieele Dagblad and in Die Achse der Guten

Einstein famously suggested that problems cannot be resolved with the same thinking that created them. So it is with Greece. As the war of words between Greece and its creditors continues to escalate while time runs out, is there any realistic hope of a workable solution? There possibly is. But probably not one that can be achieved within current thinking and within the set of rules that the Eurozone has set for itself. Any solution to the Greek issue will need to be bold and radical.

What could a solution look like? Here are some ideas that are merely intended to stimulate thinking that, for some reason, seems to be outside the current frame of the public discussion.

Empathy and Respect

The first ingredient that needs to be injected is empathy. Creditor countries and institutions need to empathise with the fact that Greece cannot be expected to keep grinding its population into the ground through endless austerity. Neither can they expect the Greeks to put up with remaining a financial colony of its creditors. Greece, on the other hand, must empathise with the fact that its creditors cannot be expected to keep paying endless amounts of their taxpayers’ money to Greece without seeing any light at the end of the tunnel.

The second ingredient is the re-building of mutual trust and respect. The current rhetoric of the leadership in many countries is reprehensible and forms no basis on which to build a European future. It is time to stop pointing fingers and to accept that the failure of Greece is a collective responsibility in which everyone, including the European Central Bank, has played a part.

Looking Forward Realistically

If a way forward is to be found, two things need to happen. We must all look forward rather than backwards. And certain realities need to be accepted.

First, we all know that Greece has deep structural and institutional problems. Turning Greece around is likely to be a twenty-year process. Second, Greece will have to find its own way forward – one that fits with its own culture and capabilities. Northern European solutions cannot be imposed on Greece – both because they will no longer be accepted, but also because they are unlikely to work. Third, current creditors need to accept publicly what they have always known – that Greece is not illiquid – it is insolvent and nearly a failed State. It will never repay its current debts in full. Finally a programme of assistance for Greece has to run over a long period but needs to be clearly structured to decrease over time so that it is clear to the Greeks that financial support is not endless and clear to other countries that they are not expected to keep paying for ever.

How this might all this be achieved?

The first step is to write off all or most of the current debt owed by Greece. If that is a step too far, the debt can be re-structured so that Greece is not expected to pay any interest or principal for at least the next thirty years.

Next is to put together a multi-lateral aid package to run over a long period. This should be a kind of mini Marshall Plan for Greece which could include the participation of non-EU countries and does not have to seek contributions from the less wealthy Eurozone members. Like the Marshall Plan, it should be structured as aid rather than yet more debt and the amounts should decrease gradually and predictably over time. In the short term, there would be guaranteed liquidity for the banking system and enough aid to ensure that the government can meet its financial obligations. Greece should be clear that the amounts agreed up front will not be increased and that the aid needs to be used wisely.

Greece should then be allowed to create a new currency to run in parallel with the Euro. It would be under the control of the Central Bank of Greece and serve as a medium for exchange within the country. Any new debt the Greek government chooses to issue going forward will be denominated exclusively in this new currency with no liability or contagion for other Eurozone countries. Several proposals for how parallel currencies could work have been developed with many eminent economists putting it forward as a useful approach and just as many others insisting that it cannot be successful. Difficult times call for bold innovations. Proposals can be refined to create a currency that would be appropriate for the specifics of the Greek situation.

Next comes the process of reform. Greece should be allowed to design its own reform programme – one that is realistically gradual and that both the Greek government and the Greek people support and believe to be practically and politically achievable within their culture and system. To help with this process, other countries and international institutions can provide technical support for the programme of reform. In addition, they can provide incentives to encourage inward investment into Greece thereby, over time, providing the technology and know-how that Greece needs to develop a competitive economy.

Such an approach will be violently resisted by many. It crosses too many red lines. Much of it is not allowable under current EU rules. But we all know that the current approach is not working and will not work. EU rules represent the kind of thinking that created the problems in the first place and they now act as a straitjacket that almost guarantees failure. Every EU country has an interest in breaking out of this past thinking and creating the flexibility that offers some chance of getting out of the current untenable situation.

Yet the above programme could find acceptance among many in creditor countries as it provides a defined end point to the need for financial support for Greece and a clear path to that end point.

Changing the Atmosphere

Most important, even the mere consideration of a programme of this nature might change the atmosphere of the discussion. It may change the current toxic environment where everyone is pulling in opposite directions with each party losing patience with everyone else, to a constructive discussion about a long-term solution with a short-term, finite safety net.

 

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