Analysis: Greek Debt Relief With a ‘Fiscal Straitjacket’

Thursday, June 22nd, 2017
Last Update: 18:38

The rescue plan for Greece as agreed in the June 15 Eurogroup is doomed to fail because it is a “fiscal straitjaclet,” according to a Peterson Institute for International Economics analysis.

The report doubts that a 2% primary surplus for 40 years can be achieved, saying that this has never happened in any country after World War II.

However, there are two positive points from the meeting of euro zone finance ministers: the unequivocal commitment of the Eurogroup to Greek debt relief and the fact that euro zone finance ministers appear ready to accept the postponement of interest payments as part of the debt alleviation package.

The report finds the content of the Eurogroup fiscal assumptions all the way to 2060 “worrisome.”

Specifically, for the period after 2022, the Eurogroup assumes “a fiscal trajectory that is consistent with its commitments under the European fiscal framework, which would be achieved according to the analysis of the European Commission with a primary surplus of equal to or above but close to 2 percent of GDP in the period from 2023 to 2060.”

“Generally, it is not clear that 40-year fiscal commitments have much meaning. The argument seems to be that it is not a new commitment but rather an implication of EU fiscal rules. But this raises the question why all European Commission scenarios so far envisaged a primary surplus of 1.5 rather than at least 2 percent of GDP over the same time horizon. Furthermore, the implementation record of EU fiscal rules historically has been poor—not just in Greece, but in many other EU countries,” the analysis says.

“To be clear, the point of a debt relief package is not to maximize the welfare of the debtor. It is to find a good balance between debtor interests, creditor interests, and maintaining good incentives for Greece and for the euro area more broadly. But this requires a realistic vision of what a country can deliver. The fiscal path assumed by the Eurogroup does not meet that standard. If a future debt relief package is built on that assumption, it will likely fall short,” the report concludes.

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