Why Greece and Europe must avoid Grexit

The Eurozone is currently facing its biggest crisis since its creation in 1999. The consequences of Greece leaving the Eurozone are highly uncertain and could very well be detrimental to both Greece and the Eurozone. To avoid Grexit, it is essential that both the creditors and the Greek government act in an economically responsible manner.

The first priority for everybody should be to get the Greek economy on a sustainable growth path. This would benefit the Greeks, reduce the risk of financial turmoil, and maximise the amount of money the Greeks can return to their creditors. If both parties are truthful in saying that they would prefer Greece to remain in the Eurozone, then they need to recognise the need to restore economic growth. That would require the following.

1. The institutions have to agree to a relaxation of fiscal austerity, at least until Greece is on the recovery path. Austerity during a recession is the wrong policy as it deepens the recession. Continuation of the stringent austerity measures implemented by Greece is delaying recovery. More fiscal austerity could fail the creditors too, if recovery is so slow that the fiscal deficit increases. Public investment has collapsed completely and providing more funds for investment projects that can improve the infrastructure and create jobs should be given priority.
2. Although some progress has been made, further structural improvements are necessary, including pensions and VAT, anti-corruption, tax compliance, and institutional reform of product and labour markets. It is important that the Greek government acknowledges that there is still a lot to be done and comes up with credible proposals.
3. The Greek economy is not likely to recover as long as there is still significant uncertainty about the future and there is no credible path towards a situation in which the Greek debt is sustainable. It is essential to achieve an early agreement to get Greek debt levels to sustainable levels, even if it is to be conditional on progress elsewhere. Conditionality on structural improvements is a good way forward.

Signed by:

Professor Oriana Bandiera

Professor Erik Berglof

Dr Margaret Bray

Professor Robin Burgess

Professor Francesco Caselli

Professor Wouter Den Haan

Dr Swati Dhingra

Dr Andrew Ellis

Dr Greg Fischer

Professor Charles Goodhart

Dr Vassilis Hajivassiliou

Dr Ethan Ilzetzki

Professor Richard Jackman

Dr Christian Julliard

Professor Henrik Kleven

Dr Camille Landais

Dr Jonathan Leape

Professor Gerard Padró i Miquel

Professor, Sir Christopher Pissarides

Dr Veronica Rappoport

Dr Johannes Spinnewijn

Professor Silvana Tenreyro

Professor John Van Reenen

Professor Dimitri Vayanos

Dr Shengxing Zhang

Dr Gabriel Zucman

This article is published in collaboration with VoxEU. Publication does not imply endorsement of views by the World Economic Forum.

To keep up with the Agenda subscribe to our weekly newsletter.

Author: Francesco Caselli is Professor of Economics at the London School of Economics.

Image: A protester holds a European Union flag in front of the parliament building in Athens. REUTERS/Christian Hartmann.