Must-Read: Barry Eichengreen: Saving Greece, Saving Europe

Must-Read: Barry Eichengreen: Saving Greece, Saving Europe: “The Greek people deserve better than what they are being offered…

…Germany wants Greece to choose between economic collapse and leaving the eurozone. Both options would mean economic disaster; the first, if not both, would be politically disastrous as well. When I wrote in 2007 that no member state would voluntarily leave the eurozone, I emphasized the high economic costs of such a decision. The Greek government has shown that it understands this…. But when I concluded that no country would leave the eurozone, I failed to imagine that Germany would force another member out….

Economically, the new program is perverse, because it will plunge Greece deeper into depression. It envisages raising additional taxes, cutting pensions further, and implementing automatic spending cuts if fiscal targets are missed. But it provides no basis for recovery or growth. The Greek economy is already in free-fall, and structural reforms alone will not reverse the downward spiral. The agreement… will worsen Greece’s slump…. As the depression deepens, the deficit targets will be missed, triggering further spending cuts and accelerating the economy’s contraction. Eventually, the agreement will trigger Grexit, either because the creditors withdraw their support after fiscal targets are missed, or because the Greek people rebel…. Finally, the privatization fund at the center of the new program will do nothing to encourage structural reform. Yes, Greece needs to privatize inefficient public enterprises. But… privatization at fire-sale prices, with most of the proceeds used to pay down debt, will not put Greek parliamentarians or the public in a mood to press ahead enthusiastically with structural reform.

Greece deserves better… a program that respects its sovereignty and allows the government to establish its credibility… a program capable of stabilizing its economy rather than bleeding it to death. And it deserves support from the ECB…. Europe deserves better, too. Other European countries should not in good conscience accede to this politically destructive, economically perverse program…. Last but not least, the German public deserve better. Germans deserve a leader who stands firm in the face of extremism, rather than encouraging it…