Greek Aid Package Not Enough

Press Release June 28, 2010

Can Greece, and the euro, be saved? Jens Boysen-Hogrefe says in a new Kiel Policy Brief that they can, but also that the Greek aid package needs to be improved. In its present form, the aid package will not be able to quell doubts about Greece’s solvency and will thus not be able to calm markets. Greece needs to establish an independent debt commission to restore its financial credibility and to be able to pursue an anticyclical budget policy. Further, Mr. Boysen-Hogrefe states that “all the countries in the euro zone need to be subject to financial policy regulations that are much stricter than those imposed by the Stability and Growth Pact. This is the only way to prevent the current crisis from happening again and to ensure the stability of the euro in the long term.”

The euro zone is in a dilemma according to Mr. Boysen-Hogrefe. It is subject to requirements aimed at maintaining a stable euro in the long term, while being subject to the systemic risks generated by adhering to these requirements. This dilemma is what caused speculation against Greece and other euro zone countries, speculation that has threatened not only the solvency of these countries but also the economic stability of the whole euro zone. The Greek aid package has obviously not been able to convince the markets that Greece is solvent. Previous Greek administrations have been too effective in destroying any trust in Greece’s public finances. The crisis this has generated has in the meantime spilled over to other countries.

“The Greek aid package and the liquidity promises are basically a good thing. They involve much less risk than other options, such as expelling countries from the euro zone,” says Mr. Boysen-Hogrefe. Nevertheless, the Greek aid package needs to be improved, he continues. Greece will have to carry out structural economic reforms and budget reforms that pose huge risks to the business cycle. The aid package may be too short term and using nominal budget quotas to meet saving targets is problematic. The EU should thus extend the period of time that aid will be given. Further, new institutional regulations will have to be established when the aid package runs out in 2013 and the IMF leaves Greece. When this happens, it would be helpful to have an independent debt commission, i.e., a commission not subject to political pressures, in place. The potential for financial policy reforms and structural reforms posed by the low Greek tax rates and Greece’s large underground economy should be able to help Greece restore its solvency within a few years time according to Mr. Boysen-Hogrefe.

Contact:

Dr. Jens Boysen-Hogrefe
Tel. +49 (0) 431-8814-210