Greece's political leaders still don't seem to get it, and neither do its official creditors. The longer this problem persists, the greater the challenge of turning around a country already beset by recession, insolvency, distressingly high unemployment and rising poverty.
Over the weekend, the country's new governing coalition led by Prime Minister Antonis Samaras signaled that it would request an extension of at least two years in the implementation of the austerity program agreed with the Troika (European Central Bank, European Union, and International Monetary Fund).
This is to be tabled in the coming days. The hope is to get European heads of government to sign off in the context of their upcoming Summit at the end of the week which will be focused yet again on steps to overcome the region's ever-deepening debt crisis.
The Greek government believes that it can diminish the detrimental impact on the population of austerity -- by stretching out the implementation of budgetary spending cuts, layoffs, wage and salary reductions, and tax increases; and, concurrently, by mobilizing additional external support from the Troika in the form of larger new loans and better terms on prior loans (principally lower contractual interest rates).
To work, this approach needs much more than the understanding and support of the Troika. Critically, it also requires that Greece take more convincing holistic steps to overcome the self-reinforcing problems of way too little growth, too much debt (including among the banks), and citizens' only lukewarm confidence in a political elite that has consistently let them down.
Greek citizens are right to expect greater reassurances that their sacrifices come with real prospects for a gradually brightening light at the end of what already seems like a very long tunnel. This will only happen if the country decisively overcomes the persistent implosion of its economy and, simultaneously, attracts new inflows of private capital for investment in production engines, competitive enhancers and job creators.
Neither of these conditions stands much chance of being met any time soon.
To perceive a real glimmer of hope, citizens need a fresh bold approach that goes beyond promising more of the same, just for longer. For their part, new private investors look for better indications that Greece is finally able to pivot from a disappointing economic past to a better future, including by removing through another debt rescheduling an overhang that persists despite what was already the largest restructuring in history of sovereign liabilities.
Without proper buy-in from both citizens and foreign private investors, it is only a matter of time until the Greek government again stretches to the limit the tolerance of the Troika. In the meantime, official financing will not act as a catalyst for private inflows; nor will it find its way down to productive activities that are extremely credit starved.
Instead, it will be used essentially to meet debt service payments to the ECB, EU and IMF, as well as inadvertently facilitate the continued exit of the diminishing amount of domestic and foreign private capital that is still in Greece.
All this suggests that the new government's desire to persist with the same policy approach, but with a somewhat more relaxed timetable, offers little hope of rupturing the vicious feedback loops that translate into endless economic contraction, alarmingly high joblessness, rising poverty, and persistent insolvency.
What Greece needs is a comprehensive change in its economic operating model.
As several other countries have discovered (as well as companies and individuals), this is an inherently tricky conversion that involves multiple risks and upfront costs. No wonder it tends to be avoided for as long as possible even though it is likely to have greater expected net benefits over time.
Eventually, countries in Greece's situation end up being forced to change their operating model by citizens' mounting economic, financial, political and social rejection. By this time, the collateral damage and unintended consequences of transition and pivot are even greater.
The incoming Greek government would be well advised to consider this before just implementing more of the same for its population, even if it is stretched out somewhat. And its European partners need the vision to support a more holistic medium-term approach to the country's devastating problems.
Dr. Mohamed El-Erian is CEO and Co-CIO of PIMCO, the global investment manager.
This post first appeared on CNBC.com.
They are being loaned money, at high rates, to pay off old money loaned at high rates. I would disagree that this is "inadvertant" on everyone's part as this story has replayed itself so many times worldwide that SOMEONE must be making money off of this.
The Argentinian or Icelandic solution is the end game. Withdraw from the euro, reregulate your economy, fix your tax mess, place tariffs on foreign made goods, Greece is a great tourist destination build up from there. Reduce military spending. Reclaim some land property from the church BEFORE you sell off national assets for pennies on the dollar to the Germans, French and Chinese.
In short, don't you feel your 'soutions' are somewhat simplistic? I suspect Mrs Merkel is a great deal brighter than you suppose, and has moved on rather from that sort of 'Sun' nonsenses.
Asia is outcompeting Southern Europe. Modeling a more stable financisl system, efficient systems, transparent gov, & green energy is the best help Northern Europe can give.
Similarly, Greece needs to recognize some obligation to its creditors, even if it can never pay off everything. Otherwise, it will be a long time before anyone outside Greece wants to sell those inside Greece anything on credit.
The USA got a similar message from China's financial head during Obama's first visit there. He had to sit through a lecture in Economics 101 on preserving the purchasing power of the money they were investing in US Treasury Notes.
Unfortunately, the leaders who will make the decisions in Greece are more concerned with the immediate problems of winning enough votes to govern. And the people running up the debt are different from those political leaders, and they act by different rules. Si, I think that Greece needs to stumble around more, before it's ready to apply the old rules.
Is this so different from Repubs still applying another tax cut for the wealthy to American woes? Or dismantling the safety net? or Obama starting another war a long ways from home? Most people on the planet lead a life of illusion.
To begin with, squeezing the ones who are least capable to pay is not austerity, it is suicide
At the same time, the shipping companies and well heels are living a tax free life. That is doubly nuts. They make the GOP in the US look like a bunch of socialists! Even the bastion of capitalism in the Far East, Hong Kong SAR, has consumer taxes. The only ace in the hole is that these welfare wealthy have threatened to go elsewhere. And indeed they could
Greece must finance itself the right way. Those who can pay and should pay must pay. Greece is the first of the domino and the world has obligations to help to giving no refuge to the welfare wealthy. No more race to the bottom. If the US can go after tax cheats hiding in some offshore accounts, why can't Greece? With the help of the world communities? Its civil servants must increase their productivity to help recoup some of these lost revenues. No more early retirement. The country needs you
"If I owe you a thousand dollars, I've got a problem. If I owe you a million dollars, you've got a problem."
The concept is that if I owe you an amount that I'm able to pay, then I simply have to save up the money, tighten my belt, and pay my bills. It's my problem. However if I owe you an amount of money that far exceeds my ability to pay then it becomes your problem. You'll end up having to take the hit, because there is simply no way I'm going to be able to pay you back.
Greece and Europe ( and by extension Europe's banks ) are in the latter position. Greece will never be able to pay its debt. It's economy is too weak and the only way it will grow again is if it was no longer in debt. All these bailout loans are doing are digging the hole even deeper. As much as we might want to lecture Greece on "paying its bills" it's simply not going to happen. Greece can't pay its bills. And it's Europe's problem.
But no longer. Maintaining an annual growth rate of 2-3%, adjusted for inflation, is mathematically very very demanding as time goes on. The real world just won't support it. So the alternative is financialization, where one can eak out a few more decades of nominal growth in GDP via the financial engineering and paper swaps we have to know and love in the English-speaking world. But even that runs its course.
Sooner or later, and preferably more by plan than by default, the economies of the developed world will have to quit their 500 year old addiction to quantitative growth. And make the transition to new economic metrics that focus on qualitative growth.
Till then, we'll just see one regime after another in Greece and every other country try to use finite resources to measure up to a target number that increases remorselessly into infinity. The math will keep saying "you came up short" and convulsions and collapses will continue, until the lesson has been learned.