A new deal was announced Monday that averted Greece’s immediate exit from the Eurozone and the potential for contagion. This week we review the latest deal and why it may not work.
Hard-Won Greek Deal Was the Easy Part. Greece agreed to important policy commitments in return for financial commitments. Implementation will be difficult and uncertain. While a worse fate may have been avoided, the deal doesn’t translate into immediate relief for a long-suffering population, according to Mohamed El-Erian, writing for Bloomberg.
The Austerity Delusion. Austerity became and remains the default policy response to the financial crisis in the Eurozone for both material and ideological reasons. Austerity is a seductive idea because of the simplicity of its core claim—that you can’t cure debt with more debt. Mark Blythe, Professor of International Political Economy at Brown University, writes in Foreign Affairs why austerity doesn’t work. [Registration required]
“I’ve seen this movie many times before,” quoting Carmen M. Reinhart, professor at Harvard, foremost expert on sovereign debt crises, in this New York Times article. “It is very easy to get hung up on the idiosyncrasies of each individual situation and miss the recurring pattern. Major debt overhangs are only solved after deep write-downs of the debt’s face value. The longer it takes for the debt to be cut, the bigger the necessary write-down will turn out to be.”
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