EUobserver opinion: Limit Greek loans to debt servicing

Most Europeans are losing patience with the current Greek government while the Greeks are losing patience with Europe.

Considering that Europeans are creditors while Greece desperately needs cash, one has to ask whose position is stronger.

Should the negotiations between Greece and its creditors continue at the same pace and with the same results, it is likely the government in Athens will condemn the country and its citizens, including those who did not vote for it, to years of economic misery.

In these circumstances the repayment of loans to creditors will become very uncertain (but Greek debt will not disappear), but a much more serious impact of such a scenario is a paralysis of decision making in the EU.

Only two ways out

It seems that there are only two solutions possible, however unlikely they seem to be now:

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  The most reasonable and economically wise solution is that the Greek Government would propose its own reform package, consistent within the agreed programme with the trio of international lenders.

Just a few months ago, the Greek economy was heading to recovery, so Athens' job is much easier than years ago. But the current government seems not to want to follow this path. It’s hard to judge whether this is a matter of incompetence, lack of understanding of the Greek situation or ideological impediments within the main ruling party.

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  The other solution is significant concession on the creditor’s side, which - without any doubts - is not acceptable.

From the economic point of view, it’s simply not correct to lend money to a debtor who is not taking steps that will ensure it pays it back. But that’s not the only reason. It is simply not possible to concede to pressure from a government that won the elections on false promises. Accepting this would be fatal for the political system of the EU.

Bankruptcy

But maybe there is a way to prevent irreversible decisions that would be tragic for Greek citizens.

A clear and still valid motto of the Greek programmes was to prevent uncontrolled bankruptcy and the inability to pay the debts. And both parties did, until a few months ago, their best to honour this goal.

Now, the Greek government has a different priority. But the consequences are serious. It is irrelevant whether Greece would in this case in the Eurozone.

Bankruptcy would bring about chaos and economic collapse (caused by legal uncertainty and no access to funds by government, people and firms).

Therefore, there seems to be a possibility that is in line with the key goal of programme for Greece.

Before the current Greek Government prepares a sound economic plan, the creditors would lend the money necessary for Greece to service the debt (or part of it, that is important and can cause financial collapse, if not repaid), while the ‘ordinary‘ expenditures of government (including wages and pensions) would have to be covered by revenues.

This would lead to primary balanced budgets (the deficit will be a result of the debt service, but nor other expenditures) being kept.

This option would create pressure on the Greek government.

Uncertainty created by its way of governing the country has already stopped the economic recovery and so lowered its tax revenues.

The proposed scenario could last for several months and would give the government time to prepare a realistic plan to further cut deficit and to stabilise the economy. Or else it would confirm the current descending path to the collapse of its economy.

The above mentioned might be viewed by creditors as potentially creating moral hazard. But it would be worth a try.

Generosity and solidarity have their place in Europe, but their limits are becoming clearer.

Ludek Niedermayer is Czech Member of European Parliament for EPP Group and Former Vice Governor of Czech National Bank