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The Kiel Institute Focus Series presents papers on current economic policy topics. Their authors are solely responsible for their content and their views or any policy recommendations they may make do not necessarily represent the views or recommendations of the Institute.

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Kiel Institute Focus

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No. 28    June 25, 2015
by Dennis J. Snower


A New Beginning for Greece — and Europe

Greece is in urgent need of clear thinking. The only reason the country has not long since defaulted on its debts is that the European Central Bank continues to provide funds to the Greek central bank through its emergency liquidity assistance (ELA) scheme. The Greek central bank, in turn, lends money to the country’s commercial banks, which lend it to Greek citizens and foreign creditors. The problem is that both groups of borrowers have been transferring large sums of money to other countries.

The result is that overdraft credits to the Greek central bank have grown by nearly 1 billion Euros a day in recent months. If Greece defaults and leaves the euro zone, these overdrafts will not be repaid.

ELA funding assumes that the Greek economy is temporarily illiquid, but not insolvent. This assumption is patently false. Despite all the pain Greece has suffered—a 30 percent drop in aggregate demand since the last cyclical peak and a rise in unemployment to more than 25 percent of the workforce—the Greek economy is still nowhere near competitive enough to repay its debts.


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