Greece's Options: An Interview with Harald Uhlig

 /  April 30, 2015, 7:37 a.m.


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Harald Uhlig is an economics professor at the University of Chicago and began serving as a consultant to the European Central Bank in 2013. He recently sat down with Gate writer James Gao to discuss Greece and the eurozone crisis.

The Gate: Greece’s current rescue package from the IMF/ECB consists of billions of dollars in loans. Given that Greece already has excessive debt, is taking on more loans [albeit to prevent default on current debt] a viable strategy for resolving the fiscal crisis?

Harald Uhlig: The question for Greece is: what are its options? There seem to be four. One: convince the rest of Europe to give them money as a gift or bailout, not as a loan. Two: roll over the current debt, perhaps add to it, while it is difficult to pay down the current debt. Three: raise taxes and cut expenditures to make payments on the existing debt. Four: default on the current debt, perhaps together with an exit from the Eurozone. Obviously, the first option may be the preferred option from Greece's perspective, and they will try, but it will be hard to accomplish. Taking that off the table, option two is still better than option three. So, it comes down to comparing option two to option four. It does seem to me that the debt burden is actually not all that onerous. Greece is perfectly capable of making the payments: the terms have been renegotiated in the past, to make that not too hard. The trouble really are the various adjustments that Greece had to promise in exchange for that. But would they be better off defaulting? If they exit the Eurozone, why would people receiving pensions from the government think they will stay stable, in terms of Euros? Why would government employees think their salaries would stay stable, in terms of Euros? So, at the end of the day, the option presented to Greece by the European Union is better than any of the alternatives that Greece has, except for the ones that it may try to create, like option one.

Gate: What measures besides bailout loans are needed to reduce Greece’s debt? Will Tsipras' proposals to crack down on tax evasion and corruption help?

Uhlig: What Greece needs is to get to a modest primary fiscal surplus. Then they can handle the debt: they can take a long time to repay it. Now, to get a modest primary fiscal surplus, they can try three things: cut expenditures, raise taxes (or be better at collecting them) or get the economy to grow, so that it produces more fiscal revenues as a byproduct. Cracking down on tax evasion and corruption is always a good idea, but will it work? Good luck with that. So then, it may be better to focus on the other options. Raising existing taxes typically is not great for economic performance. There still seems to be a lot of surplus employment in the government sector, where expenditures could be cut. And perhaps there is more that can be done regarding structural reforms of labor markets and competition, that can encourage the economy to grow: perhaps not right away, but eventually.

Gate: How bad would a Greek exit from the Euro be for the European and Greek economies?

Uhlig: I cannot really see a Greek exit. Why would Greece do it? Even if there is a default, even if the ECB withdraws the emergency liquidity assistance from Greek banks, Greece can muddle through, paying workers with coupons, putting in capital restrictions and so forth. It is done in Illinois, it has been done in Cyprus, in Argentina: there are lots of options for Greece other than exiting. Exiting would mean exiting the European Union as well. That's bad for Greece. While they are part of the European Union, they can pressure for help from the rest, and they will receive it. Conversely, I do not see that Germany or France would want to see Greece exit either. It would mean rolling things back on the path of further integration and harmony in Europe: that is a much bigger and more important political goal, than the minutiae of some payments here and there. It is no surprise that the current bailout measure passed with a large majority in the German parliament. Despite all the grumbling, Germany wants to help and so do the other countries. It is one Europe, Greece is the origin of Europe! A Greek exit would be a political disaster. Economically, though, should Greece default or even exit, some banks will experience some losses: it is hard to predict exactly what will happen, but it is hard to imagine that it will have anything more than a rather minor impact.

Gate: In your opinion, has fiscal austerity had a counterproductive effect, by limiting economic growth in Greece and shrinking the tax base?

Uhlig: "Fiscal austerity" is a clever label that somehow has stuck, but I think it is misleading. What has really been going on that Greece has been spending borrowed money, and they kept borrowing at a faster clip than what is sustainable. Suppose you do that as a household. What has to happen? At some point, you need to stop borrowing, you need to live within your means, and you have to either try to repay your debt or default. Everyone would like to spend more than what they receive! And, of course, it limits "growth" if you can no longer do that. But who is supposed to give you the resources for living beyond your means? What gets forgotten with the "fiscal austerity" label is this. Greece is free to borrow as much as they want on private markets, but private markets were no longer willing to lend to Greece. If Europe and the ECB had not stepped in and replaced much of that lost lending, if the debt terms would not have been renegotiated, it would have had a much more drastic effect on fiscal resources in Greece. So, one could argue (and I think it is fair to argue), that the European policies actually were the opposite of "fiscal austerity" compared to the benchmark case of only borrowing on private markets. But how far is it reasonable to ask them to go in terms of providing funds to Greece, which Greece may not repay? Many member countries in the IMF are already grumbling about what the IMF is doing here. Let me put it this way: if Paul Krugman or other folks think there is too much austerity in Greece, they are welcome to send money to the Greek government. If they are not willing to do so, why, exactly, are they asking for others to send their hard-earned money? I think there is a lot of wishful thinking going on, to conjure resources magically out of nothing.

Gate: Is Greece merely going through a downturn in the business cycle, or does Greece face a prolonged structural downturn?

Uhlig: It does seem to me it will take quite a long time for Greece to get out of the current mess. This has the magnitude of a deep, great depression. Life in Greece is very sad right now.

Gate: Did Alexei Tsipras concede too quickly in striking the deal to extend Greece’s bailout terms for four additional months, or could he have extracted better terms had he negotiated longer?

Uhlig: I am not sure that Alexei Tsipras has conceded much of anything at this point. He wanted extra time. Greece gets more funds in the short term, in particular via the emergency liquidity assistance from the ECB. So, Greece right now gets extra money without doing anything in return so far, except for writing that letter of intent on Monday. The rest is still up to negotiation and to diplomatic smoke and mirrors. Europe won't often find the guts to threaten Greece with letting them go. They got close to it a week ago. Tsipras may be counting on Europe lacking that resolve the next time around. He may be right.

The image featured in this article is courtesy of the Becker Friedman Institute. The original image can be found here


James Gao


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