Saving the Euro – Viewpoint fromTroika Dialog’s Evgeny Gavrilenkov

Evgeny Gavrilenkov, chief economist at Troika Dialog bank, suggests that Greece’s pain may be the price required to save the euro.

The longer the Greek debt saga continues, the more boring it becomes, though clearly not for the Greeks themselves.

In Greece’s case, the negotiation process itself appears to be more important than the outcome, in accordance with that famous quote from Eduard Bernstein (1850-1932), one of the intellectual leaders of Germany’s Social Democratic Party: “The final goal, whatever it may be, is nothing to me: the movement is everything!”

For now, the goal of the ongoing talks is to find a solution to Greece’s debt situation that would bring a bailout via additional lending and performing a haircut on the existing debt (of up to 70%). This would take the debt/GDP ratio down from 160% to 120% by 2020 – comparable with Italy’s current level but higher than Portugal’s (around 106% in 2011, according to the IMF).

The goal of bringing Greece’s debt/GDP ratio down to the same level as these troubled countries looks somewhat hollow and slightly absurd, especially as no one can guarantee that these objectives can be met against a backdrop of contracting GDP (and tax base). Winning time and ringfencing Greece is what it is all about.

The Italian economy stopped growing some time ago, and its debt/GDP has consistently exceeded 100% for some time, and debt service has become a significant issue. Italian GDP slid around 4.8% over 2008-10 and is projected to continue falling this year, which also implies a shrinking tax base.

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