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INTERVIEW: German Government Adviser: No Alternative To Greek Debt Cut
By Hans Bentzien
Of DOW JONES NEWSWIRES
WUERZBURG, Germany (Dow Jones)--There is no way that Greece can avoid a reduction in its debt burden, Peter Bofinger, a top economic advisor to the German government, told Dow Jones Newswires Tuesday.
Bofinger, who serves on the government's five-person council of economic "wise men," said that Greece's European peers could show solidarity with the troubled Mediterranean country by cutting the interest rate at which it lends to Greece. This would provide some relief at a time when the country is going through a vicious cycle of needing both to slash wages and salaries, thus throttling output while at the same time trying to cut debt.
The adviser, who teaches economics at the University of Wuerzburg, repeated his call for common bonds at the euro-zone level, or "eurobonds." These wouldn't result in higher interest rates for Germany, he insisted.
Helping Greece come to terms with its debt is a more pressing issue for Europe than a convergence in competitiveness, he said. Just as private households can see their debts reduced when they become unmanageable, the same must be considered for Greece. "I believe in Greece there is no way around" a reduction of its debt burden, he said.
"Anything else is sticking your head in the sand," he said.
Europe can show solidarity towards Greece by helping it pay down its debt at low interest rates. This could be achieved since the euro zone's rescue fund, the European Financial Stability Facility, borrows at very low interest rates. "Ideally one would pass this on to Greece with only a very low premium," because this would then give Greece a chance to cope with its debt at low interest rates, Bofinger said.
"Of course the requirement would be that Greece stick to its consolidation targets."
Reducing interest rates while Greece sticks to its budget-cutting plans would offer an incentive to Athens, Bofinger argued. By contrast Greece is now being hit twice, once through forced budget consolidation and secondly through its punitive interest rate. "That makes it nearly unrealistic that Greece can emerge out of this situation."
Greece's bailout in fact predates the EFSF and is financed via an agreement reached a year ago with its European partners and the International Monetary Fund. The bailout totals EUR110 billion and originally had a maturity of three years.
Earlier this year, creditors agreed to reduce the interest rate that Greece pays on its debt by 1 percentage point to 4.2%. They also extended the maturity on the debt from three to seven-and-a-half years.
Eurobonds would help the situation, Bofinger said, because they would allow highly indebted countries to deal with their debt at low rates without those obligations spinning out of control. "Indeed, since we are taking liability for these countries now, we should do everything to arrest such a debt spiral," he said.
Critics, most vocally in Germany, have argued that eurobonds would encourage fiscal profligacy by providing in essence a safety net to protect the fiscally sinful at the expense of the virtuous. Bofinger said this problem could be solved by linking eligibility for eurobonds to countries' sticking to consolidation plans and having their budget proposals approved by the European Commission.
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L'amico della Merkel.
By Hans Bentzien
Of DOW JONES NEWSWIRES
WUERZBURG, Germany (Dow Jones)--There is no way that Greece can avoid a reduction in its debt burden, Peter Bofinger, a top economic advisor to the German government, told Dow Jones Newswires Tuesday.
Bofinger, who serves on the government's five-person council of economic "wise men," said that Greece's European peers could show solidarity with the troubled Mediterranean country by cutting the interest rate at which it lends to Greece. This would provide some relief at a time when the country is going through a vicious cycle of needing both to slash wages and salaries, thus throttling output while at the same time trying to cut debt.
The adviser, who teaches economics at the University of Wuerzburg, repeated his call for common bonds at the euro-zone level, or "eurobonds." These wouldn't result in higher interest rates for Germany, he insisted.
Helping Greece come to terms with its debt is a more pressing issue for Europe than a convergence in competitiveness, he said. Just as private households can see their debts reduced when they become unmanageable, the same must be considered for Greece. "I believe in Greece there is no way around" a reduction of its debt burden, he said.
"Anything else is sticking your head in the sand," he said.
Europe can show solidarity towards Greece by helping it pay down its debt at low interest rates. This could be achieved since the euro zone's rescue fund, the European Financial Stability Facility, borrows at very low interest rates. "Ideally one would pass this on to Greece with only a very low premium," because this would then give Greece a chance to cope with its debt at low interest rates, Bofinger said.
"Of course the requirement would be that Greece stick to its consolidation targets."
Reducing interest rates while Greece sticks to its budget-cutting plans would offer an incentive to Athens, Bofinger argued. By contrast Greece is now being hit twice, once through forced budget consolidation and secondly through its punitive interest rate. "That makes it nearly unrealistic that Greece can emerge out of this situation."
Greece's bailout in fact predates the EFSF and is financed via an agreement reached a year ago with its European partners and the International Monetary Fund. The bailout totals EUR110 billion and originally had a maturity of three years.
Earlier this year, creditors agreed to reduce the interest rate that Greece pays on its debt by 1 percentage point to 4.2%. They also extended the maturity on the debt from three to seven-and-a-half years.
Eurobonds would help the situation, Bofinger said, because they would allow highly indebted countries to deal with their debt at low rates without those obligations spinning out of control. "Indeed, since we are taking liability for these countries now, we should do everything to arrest such a debt spiral," he said.
Critics, most vocally in Germany, have argued that eurobonds would encourage fiscal profligacy by providing in essence a safety net to protect the fiscally sinful at the expense of the virtuous. Bofinger said this problem could be solved by linking eligibility for eurobonds to countries' sticking to consolidation plans and having their budget proposals approved by the European Commission.
***
L'amico della Merkel.
Ultima modifica:
Anche se ne ho prese di bastonate sino a ora 
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