The past weekend's spring meetings of the International Monetary Fund in Washington focused on the Greek sovereign debt crisis – the first such crisis in living memory to concern a high-income country, and in the eurozone no less. Even more telling than the shift of focus from emerging markets is the widening divide in the views of those institutions and governments leading efforts to secure an orderly resolution.
Continuing on the path of least resistance – a “Plan A” of official financing banking on a mix of deep fiscal cuts, inadequate structural reforms and hopes that markets will stay open, with growth doing much of the heavy lifting – is a risky bet that is very likely to fail. Already this week, financial markets and credit rating agencies have voted against this approach and started to price in a high probability that Greece will need to restructure its public debt coercively, with contagion to the rest of the eurozone periphery now a serious risk. Augmenting the programme for Greece alone – up to €100-€120bn as suggested by the IMF – will not work either.
Far better to move to Plan B. This would involve a pre-emptive debt restructuring for Greece; a strengthened fiscal adjustment plan in the eurozone periphery; far-reaching structural reforms; a larger IMF/European Union programme to help Greece and prevent contagion to others; further monetary easing by the European Central Bank; fiscal and domestic demand stimulus in Germany; and a co-ordinated effort to address the institutional weaknesses of Europe's economic and monetary union.
