Thursday, July 16, 2015

Greece Needs Merkel's Tough Love

Whether Greece knows it or not, Angela Merkel has done Greece a great favor. Simply put Greece is incapable of reforming on its own. Let's face it, since Greece achieved its independence from the Ottoman Empire in 1832 it has hardly been a paragon of good government and economic growth. Left to its own devices Greece doesn't work.

What the EU has done under Merkel's leadership is force Greece to undertake the needed labor, pension, fiscal, taxation and market reforms that are necessary for economic growth. To be sure, in the short run Greece will go through economic hell, but remember leaving the Euro would bring with it a far more difficult hell. For those who argue that Greece should return to the Drachma, I have one simple question: where are the foreign exchange reserves to support a new currency. Tspras, to his credit, understood this fact.

Of course Merkel and the EU will have to relent on debt relief. The IMF is correct in its position that the current Greek debt situation is unsustainable. Although the EU will not or cannot grant a direct haircut to Greece's debt, it is in their power to restructure Greece's debt burden by lowering interest rates and extending maturities which would be the equivalent of a direct haircut.

Greece has stepped up to the plate by accepting the EU bailout conditions, it is now up to to the EU to move on debt relief. If it all works out in 20 years Greece will build a statue to Angela Merkel in Syntagma Square.

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