UHMM

The EU-IMF adjustment programme for Greece improves on the previous EU position that Greece must bear all the costs of its troubles alone – but not by much.... [T]he new plan is nearly as delusional as the old one. As Arvind Subramanian argued on this page last week, it implies three years of crippling austerity, at the end of which Greece’s flattened economy will have to support a far larger public debt than today’s. (This is assuming things go well.)

The plan resolves nothing. It is a delaying action at best, and a pretty desperate one at that. Default looks ever more likely. This can be planned, with some hope of keeping things orderly – though the best chance of that has now been missed. Or it can be unplanned, after a further period of denial.... The harder question is whether even a Greek default will resolve Europe’s difficulties. My bet would be no.

Greece has a huge primary budget deficit. At least for a time after a debt restructuring it would struggle to find lenders. So even with its debts written down to nothing, it faces a period of fiscal austerity that will be wrenching at best and politically impossible at worst – with no central bank to support demand, and no currency of its own to devalue. The EU says that default must be avoided at any cost. I say default will happen. The EU says exit from the euro is not an option. I would not count on that, either. In any event, the US had better brace itself.

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