- The Washington Times - Friday, October 28, 2011

The new European rescue deal is being put in place. While details are still being hammered out, it will effectively allow Greece to default on its debt - despite protestations to the contrary.

The official European Council statement released Thursday said the deal will result in a “nominal discount of 50 percent on notional Greek debt held by private investors.” That’s a fancy way to describe what amounts to an orderly default. It also happens to be the least bad choice among the many horrible options that have been on the table. Analysts have called for a haircut in government debt of at least 50 percent to bring Greek debt to sustainable levels. This package just might reach that goal, depending on participation.

That’s where the good news ends and business as usual returns. The announced goal of bringing Greek government debt levels down to 120 percent of gross domestic product by 2020 is a step in the right direction, but it leaves far too much red ink. Most economists consider a 90 percent debt ratio to be the level where economic growth is imperiled. At the same time, the deal includes an additional $140 billion multiyear lending program to bail out Greece, jointly funded by the European Union and the International Monetary Fund (IMF). The funds are supposed to be released only if Greece meets fiscal targets but given past history, such conditions are only for show.

Even worse, the Europeans seem to have taken a leaf out of Washington’s playbook and are considering leveraging the European Financial Stability Fund (EFSF). So far, Slovakia’s stubborn refusal to vote for an expansion has inspired the dangerous option of leveraging the EFSF bailout trough to $1.4 trillion. If Italy and Spain get into serious trouble, as seems likely, even that sum will be insufficient.


The fundamental problem in Europe is one of growth. Germany, the powerhouse of the EU, is beginning to stall. Economic growth in France, the other big economy, is almost at a standstill. Factory orders are down, and business confidence is plunging.

Fiscal austerity can only stop the bleeding. Debt can be repaid only if the economies of these countries grow, but growth cannot and will not happen as long as bailouts are available and government interference increases. Much of the unrest in these countries is related to lack of jobs. Governments don’t create wealth or jobs, the private sector does. The IMF’s prescription of expansionary monetary policy is not the answer in the EU, any more than it was here. Freeing the private sector is the only way to achieve the growth needed - in Europe and in the United States.

Nita Ghei is a contributing Opinion writer for The Washington Times.