Little Faith in Ugly Greece Bailout

It's gonna be extremely harsh.

At the Wall Street Journal, "Third Time’s the Charm? Little Optimism Over New Greece Bailout":

ATHENS — Greece’s new bailout is still in the making, but many economists already doubt it will work better than the last two.

The prospective program, involving as much as €86 billion ($96 billion) in further financing for Greece, could take several weeks to draft, European officials have indicated. Much can go wrong before then and a Greek exit from the euro—which came closer in the past week than ever before—remains a risk.

But the outlines are already clear after Monday’s summit of eurozone leaders.

The plan repeats the central features of the previous bailouts in 2010 and 2012. In return for loans, Greece’s creditors—other eurozone governments and the International Monetary Fund—want to see stringent fiscal retrenchment as well as market-oriented overhauls of Greece’s economy.

Greece’s overall debt is supposed to fall over time thanks to fiscal austerity, a return to economic growth, and hefty privatization proceeds.

The emphasis remains on fiscal austerity, because creditors view tough budget targets as the key to getting their money back and Greece back to funding itself on bond markets.

European Union and Greek officials claimed last year that the bailout was finally working when Greece briefly sold bonds again and its economy grew for part of the year, albeit from a deeply depressed base.

The good news proved ephemeral. Investors soon abandoned Greek debt as Athens again struggled to implement Europe’s bailout terms and political uncertainty returned, pushing the economy back into recession last winter.

Although heavy austerity greatly reduced Greece’s budget deficit, the economic collapse meant that its ratio of debt to gross domestic product—an indicator of solvency—rose even higher.

And Greece’s collapsing GDP and employment rate during its bailout years have eroded public support for the kind of market-friendly reforms that most economists believe are necessary if Greece is ever to prosper inside the euro.

Critics including many economists and some policy makers have leveled a string of criticisms at Greece’s earlier bailouts. Among the most common charges: The scale and pace of fiscal austerity proved to be an overdose that Greece’s sclerotic economy and unstable political system couldn’t cope with. Forecasts for growth, tax revenues and privatization revenues were overly optimistic. Broader economic overhauls took second place to fiscal cuts. And measures such as labor-market deregulation, inspired by international economic orthodoxy, failed to address Greece’s idiosyncratic problems, such as weak public administration and a sluggish legal system.

Defenders of the programs, including many European policy makers and IMF officials, retort that the main problem lay with Greek governments, which failed to take ownership of and responsibility for the programs.

The new program looks set to suffer from all of those problems, economists say.

“It’s just a continuation of failed policy packages, and if anything it’s worse,” says Charles Wyplosz, professor of economics at the Graduate Institute of International Studies, Geneva. “It hasn’t worked, it won’t work.”

One of the biggest problems, analysts say, is that Europe has given up even trying to persuade Greece that its prescriptions are good for the country—something that few Greeks believe any longer. Instead of much-vaunted “ownership” of the program by Greek leaders, Europe is instead counting on duress.

Eurozone leaders and finance ministers in recent days made it clear to Athens that only full compliance will avert Greece’s expulsion from the euro...

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