In the following op-ed, 13 prominent economists from around the world call on Greece to sign a credible agreement with the Europeans immediately.
The multi-month negotiation between Greece and the Europeans has not yet reached an agreement. The long negotiation has created unprecedented and unnecessary uncertainty that has brought the Greek economy to a standstill. Without an agreement, Greece will default in July within the euro or outside of the euro ("Grexit").
A Grexit and move to a new drachma would be a complete disaster for Greece. The banks would collapse as depositors would withdraw their euros not knowing whether they would be able to withdraw them later and at what exchange rate. The new weak currency will make imports very expensive, cutting the purchasing power of Greeks by half or one third. Irresponsible politicians would print too many new drachmas, feeding additional inflation and eliminating any international competitiveness gains resulting from the weaker currency. Shortages of even necessities such as medicines and fuel would become the norm.
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Some may argue that a bankruptcy within the euro avoids all these issues. This is very misleading. The Greek government would not be able to manage a bankruptcy within the euro. It would also require tremendous support from the European Central Bank, which would be unlikely in the circumstances leading to a Greek bankruptcy, such as not paying Greece's obligations to the International Monetary Fund or the ECB itself. Within a short time, bankruptcy within the euro would become a Grexit. Thus, both types of bankruptcy (within and outside of the euro) lead to the total disaster of the new drachma. It is also highly doubtful that Greece can actually remain in the EU itself, following a Grexit.
What would be crucial elements of a good agreement? Besides the fiscal issues of balancing the budget and making pensions proportional to contributions, a good agreement should emphasize microeconomic reforms. It should greatly simplify the procedures for running a business in Greece and reduce business taxes, in order to attract investment and create a productive, export-oriented sector, new jobs, and debt-repayment potential. It should reduce the huge and inefficient state sector that weighs down on the private sector and the taxpayers. The procurement mechanisms of the state should become competitive. Greece should proceed with privatization of trains, airports, ports, and the energy sector. The "closed sectors" of the economy (such as pharmacies and transportation) should be opened to competition. The labor market should be liberalized and the state should crack down on the underground economy that pays no taxes and no pension contributions.
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Finally, an agreement must restructure the Greek sovereign debt to European countries and the European Stability Mechanism. Keeping the nominal value constant, the best way to restructure the debt is to elongate its maturities. If maturities are moved to 75 years and the presently variable interest rates are converted to fixed ones and slightly reduced, the net present value of the debt will be reduced by 50 percent. A 10-year grace period (during which interest is not paid but recapitalized) with the money saved invested would promote growth.
Growth is, in fact, the only guarantee that Greece will pay its debts.
Written by:
Marios Angeletos, MIT
George Constantinides, University of Chicago
Haris Dellas, Universitat Bern
Nicholas Economides, New York University
Michael Haliassos, Goethe University Frankfurt
Yannis Ioannides, Tufts University
Costas Meghir, Yale University
Stylianos Perrakis, Concordia University
Manolis Petrakis, University of Crete
Chris Pissarides, Nobel Laureate, London School of Economics and University of Cyprus
Thanasis Stengos, University of Guelph
Dimitris Vayanos, London School of Economics
Nikos Vettas, Foundation for Economic and Industrial Research; Athens University for Economics and Business
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