By Tom Ellis
He says that a debt haircut is crucial for Greece, adding that this should involve not just official sector debt, but private creditors as well, and should also be quite sizable if it is to have any real effect.
Stiglitz welcomes the change of stance displayed by German Chancellor Angela Merkel toward Greece, but says that there will have to be a policy shift toward more growth-driven measures in order to help not just Greece but Europe as a whole to exit the crisis.
Stiglitz, who served as chief economist at the World Bank in 1997-2000 and was on the Council of Economic Advisers to US President Bill Clinton in the 1995-97 period, is a well-known critic of “free market fundamentalists” and international financial institutions such as the International Monetary Fund.
How would you describe this two-and-a-half year crisis that Greece and the eurozone are going through?
The eurozone crisis reflects fundamental flaws in the institutional arrangements of the eurozone, and a flawed diagnosis of the sources of the crisis. Given this, it is not surprising that the responses have been badly flawed, and in some cases have exacerbated the problems.
You have been very critical of the austerity policies that have been chosen.
Excessive austerity has had the predictable (and predicted) effect of inducing depressions and recessions – to the point where all of Europe is expected to have negative growth in the coming year. As GDP has decreased, so too has tax revenue; the expected improvements in fiscal performance have not materialized. The debt-to-GDP ratio increased. That austerity would have these effects should have been anticipated, given the long history of the failures of such measures.
The problems posed by austerity have been exacerbated by the decreased availability of credit – again the inevitable result of the failure of Europe’s leaders to create a viable eurozone banking system.
Do you find the actions of the European leaders not enough?
The current structures are nonsustainable: There will either have to be “more” Europe or less. More Europe would require some form of mutualization of debt, a eurozone-wide banking system, with common supervision, common resolution, and common deposit insurance, and a growth strategy to replace the anti-growth austerity strategy that has dominated for the last two-and-a-half years. While some of Europe’s leaders recognize what has to be done, the pace of reforms is out of synch with the market.
Should and will there be a haircut on Greece’s debt and, if so, when? And what would the optimum size of it be?
There should, and almost surely will have to be, a haircut on Greece’s debt, with participation of both official and private creditors. The size will depend on the ability of Europe’s leaders to address the fundamental problems and restore growth.
We have learned from previous restructurings that unless there is a deep restructuring, growth will not be restored, and the country may face another restructuring a few years later – with all the adverse consequences that that entails.
An important part of an effective restructuring may be growth-linked bonds, of the kind that Argentina employed.
Was the bond buyback the right way to go or should other measures have been chosen?
A bond buyback can be an important component of an effective debt restructuring. Creditors voluntarily sell their bonds back at the market price. The desirability of this strategy has been enhanced by the extensive litigation over Argentina’s restructuring, which has cast a pall over the entire sovereign debt market. The only concern is that the buyback program may result in an increase in the market value of the debt, and so the effective extent of restructuring may be insufficient. The buyback program may have to be followed by further restructuring.
Should achieving debt sustainability, according to the IMF analyses, be the basis for the direction of the Greek economy?
The objective of economic policy should be to quickly restore the economy to full employment and sustainable growth. This will require, of course, ensuring that the level of debt is sustainable, and that may mean significant debt restructuring.
In the past, the IMF has often been overly optimistic about future growth paths (when it comes to debt restructurings), and so debt restructurings have not been sufficiently deep. The continuing debt burden has inhibited growth – growth often turns out less than their projections, and another debt restructuring is required down the line. That is why it is important to have a deep restructuring, and to use growth-linked bonds as part of the restructuring package.
How would you describe the turnaround by Europe and mainly Chancellor Merkel with respect to Greece, where she now says the country is doing the right thing?
It is obviously welcome. But it needs to be followed by a change in policy – less austerity and more growth, an emphasis on the restructuring of the eurozone arrangements, a recognition that structural reforms within the country take time, and that some structural reforms adversely affect aggregate demand, and with a deficiency in aggregate demand being the central problem, worsen current economic performance.
Do you expect Greece to make it and return to growth in the next months or could it be forced to exit the euro as some predict?
This is as much a matter of politics as economics – of European politics as much as Greek politics. Will Europe be able to make the necessary reforms and change its course of action in a timely way? Will Europe be able to restore growth to itself? Will Europe be willing to provide the assistance required? The costs of Europe’s failures are grave – not only is Greece in depression, but so is Spain, and others are likely to join. The costs are enormous, both in the short and long term: The 50 percent youth unemployment rate is especially devastating. In a period in which skills should be developed, they are atrophying, and disillusionment is setting in. Many of those with skills are leaving the countries – and more would leave were it not for the weaknesses elsewhere in Europe. None of this bodes well for the future. It is not surprising that there are severe political repercussions.
Will Greece be forced to exit the euro as some are predicting?
The cost of leaving the euro would be high. But, unless there is a change in course in Europe, there are high costs of staying in the euro. Unless something happens, the costs will mount, and the calculus of whether the country is better off staying in or leaving may change.