Are the Domestic Reforms and EurozoneIMF Package for Greece Enough Some

Are the domestic reforms and eurozoneimf package for

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Are the Domestic Reforms and Eurozone/IMF Package for Greece Enough ? Some economists fear that Greece’s fiscal austerity plan, which entails cutting budget deficits by 9% of GDP in four years, is too ambitious and will be politically difficult to implement. As a result, some economists suggest that the Greek government could still default on or, considered more plausible, restructure its debt. In fact, some observers regret that debt restructuring was not included in the IMF package in order to provide a more orderly debt workout. Restructuring would also push some of costs of the crisis onto private banks that, it is argued, engaged in “reckless lending” to Greece. However, a default or debt restructuring could accelerate the contagion of the crisis to other Eurozone countries, as well as hinder Greece’s ability to regain access to capital markets. In addition, even if Greece’s government stopped servicing its debt, it would still need substantial fiscal austerity measures to address the government deficit unrelated to debt payments. This has led some economists to argue that Greek fiscal austerity should be offset by more accommodating monetary policy by the ECB. As a result, some economists have suggested that Greece should or may leave the Eurozone. This would likely require abandoning the euro, issuing a national currency, and allowing that currency to depreciate against the euro. The Greek government would also probably have to put restrictions on bank withdrawals to prevent a run on the banks during the transition from the euro to a national currency. It is thought that a new national currency depreciated against the euro would spur export-led growth in Greece and offset the contractionary effects of austerity. Since Greece’s debt is denominated in euros, however, 17
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leaving the Eurozone in favour of a depreciated national currency would raise the value of Greece’s debt in terms of national currency and put pressure on other vulnerable European countries. Additionally, some argue that a Greek departure from the Eurozone would be economically catastrophic, creating the “mother of all financial. An intuitive explanation is that tax increases reduce employment and investment incentives and cause other supply-side distortions. These effects weaken natural output, reducing output expectations and suppressing current demand. By contrast, expenditure cuts accompanied by tax reductions limit distortions and improve output expectations. Discounting higher future output in present consumption and investment mitigates the demand effects of lower government expenditure. Overall, given the supply-side profile of many EMU countries, fiscal consolidation is more likely to be successful if it is mainly expenditure- rather than tax-based. This is particularly true for Greece, where high taxation levels (increased substantially in 2015–17) have created high distortions and incentivised tax-evasion (see Artavanis et al. 2016).
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