El-Erian: Greece Needs to Chart a Different Course
Greece’s political leaders still don’t seem to get it, and neither do its official creditors. The longer this problem persists, the greater the challenge of turning around a country already beset by recession, insolvency, distressingly high unemployment and rising poverty.
Over the weekend, the country’s new governing coalition led by Prime Minister Antonis Samaras signaled that it would request an extension of at least two years in the implementation of the austerity program agreed with the Troika (European Central Bank, European Union, and International Monetary Fund).
This is to be tabled in the coming days. The hope is to get European heads of government to sign off in the context of their upcoming Summit at the end of the week which will be focused yet again on steps to overcome the region’s ever-deepening debt crisis.
The Greek government believes that it can diminish the detrimental impact on the population of austerity – by stretching out the implementation of budgetary spending cuts, layoffs, wage and salary reductions, and tax increases; and, concurrently, by mobilizing additional external support from the Troika in the form of larger new loans and better terms on prior loans (principally lower contractual interest rates).
To work, this approach needs much more than the understanding and support of the Troika. Critically, it also requires that Greece take more convincing holistic steps to overcome the self-reinforcing problems of way too little growth, too much debt (including among the banks), and citizens’ only lukewarm confidence in a political elite that has consistently let them down.
Greek citizens are right to expect greater reassurances that their sacrifices come with real prospects for a gradually brightening light at the end of what already seems like a very long tunnel. This will only happen if the country decisively overcomes the persistent implosion of its economy and, simultaneously, attracts new inflows of private capital for investment in production engines, competitive enhancers and job creators.
Neither of these conditions stands much chance of being met any time soon.
To perceive a real glimmer of hope, citizens need a fresh bold approach that goes beyond promising more of the same, just for longer. For their part, new private investors look for better indications that Greece is finally able to pivot from a disappointing economic past to a better future, including by removing through another debt rescheduling an overhang that persists despite what was already the largest restructuring in history of sovereign liabilities.
Without proper buy-in from both citizens and foreign private investors, it is only a matter of time until the Greek government again stretches to the limit the tolerance of the Troika. In the meantime, official financing will not act as a catalyst for private inflows; nor will it find its way down to productive activities that are extremely credit starved.
Instead, it will be used essentially to meet debt service payments to the ECB, EU and IMF, as well as inadvertently facilitate the continued exit of the diminishing amount of domestic and foreign private capital that is still in Greece.
All this suggests that the new government’s desire to persist with the same policy approach, but with a somewhat more relaxed timetable, offers little hope of rupturing the vicious feedback loops that translate into endless economic contraction, alarmingly high joblessness, rising poverty, and persistent insolvency.
What Greece needs is a comprehensive change in its economic operating model.
As several other countries have discovered (as well as companies and individuals), this is an inherently tricky conversion that involves multiple risks and upfront costs. No wonder it tends to be avoided for as long as possible even though it is likely to have greater expected net benefits over time.
Eventually, countries in Greece’s situation end up being forced to change their operating model by citizens’ mounting economic, financial, political and social rejection. By this time, the collateral damage and unintended consequences of transition and pivot are even greater.
The incoming Greek government would be well advised to consider this before just implementing more of the same for its population, even if it is stretched out somewhat. And its European partners need the vision to support a more holistic medium-term approach to the country’s devastating problems.
Dr. Mohamed El-Erian is CEO and Co-CIO of PIMCO, the global investment manager.