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Analysis

Priority is debt relief

by Ruud Lubbers and Paul van Seters

The Eurogroup of European finance ministers needs to change course, modify its targets on Greece and aim for a reasonable balance between debt relief and deficit reduction.

The International Monetary Fund has admitted that Greece should receive further debt relief. Since Greek people still show deep-seated opposition to further austerity – demonstrated by Prime Minister Alexis Tsipras’ victory in the referendum on 5 July – creditors need to show a sense of magnanimity.

The debt relief is a matter of separate negotiations between the IMF, the European Central Bank and the European rescue funds (EFSF and ESM). The process begins with the extra credit tranche that Greece urgently needs. That extra tranche should be entirely financed by EU institutions. In return, the IMF should be prepared to accept a cut of 50% on Greece’s current obligations. In a longer-term step, the IMF and Eurogroup should determine an approach to debt relief over several years and how the burdens can be distributed between the two institutions. This debt relief should be based on the principle that Greece needs extra financial headway to comply with the economic convergence criteria agreed in the Maastricht Treaty.

This requires a political accord between Greece and the other euro countries, reflecting a balance between necessary deficit reductions and recovery of Greece’s growth potential. Ireland, Portugal, and Spain have shown that countries which now take the Maastricht criteria seriously can produce better economic figures when they take action based on appropriate democratic processes. Tsipras has to show he is more than simply the leader of a left-wing party. He must become a prime minister for all Greeks. Greece’s humanitarian challenges show how welfare cuts alone are not appropriate as a means of cutting deficits sustainably. The Greek population seems to have united in opposing this route, and instead asks for solidarity and saving to be spread throughout all layers of society.

European politicians must accept that a longterm solution for Greece requires Europe to undertake a full-scale political and psychological turnaround. The right policy on Greece is one that acknowledges Greek dignity and stimulates growth.

The Eurogroup will then be able to play its originally conceived role. This is to help member states to build on their own efforts and to compare their achievements with those of other member states. If they take full note of bruised feelings in Greece, and launch appropriate action, then the Greek turbulence will turn out to have been a salutary wake-up call for Europe.

■ Ruud Lubbers is a former Netherlands Prime Minister and Paul van Seters is Professor at Tilburg University

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