Renegotiate Greek Debt

Economic growth in the European Union remains sluggish years after the 2008 recession. While individual debt-ridden countries like Greece pose a threat to eurozone viability, the overarching problem remains continent-wide stagnation. It is clear that the stringent policies of the past few years have not been effective; instead, austerity measures on failing economics should be replaced by eurozone-wide policies to reinvigorate markets.

Last month, Greece repudiated the austerity measures imposed by the European Central Bank with the election of the left-wing Syriza party, in a decisive victory against the center-right New Democracy party led by Antonis Samaras. The new Greek prime minister, Alexis Tsiparas, promptly announced the end of austerity, which was initially instituted as a condition for the 240 billion euro bailout loan from other European nations following Greece’s 2010 government-debt crisis. He also refused a seven billion euro loan installment necessary to pay off debts by August; failure to do so would likely result in Greek default on debts totaling roughly 320 billion euros.

Much of the Greek debt is held by Germany, perhaps the staunchest proponent of austerity in the eurozone. That position has not changed: Last Thursday, German Finance Minister Wolfgang Schauble met with the new Greek Finance Minister Yanis Varoufakis and rejected renegotiation of Greek debt obligations. The day before, the ECB rejected a similar offer to renegotiate.

This is a drastic mistake. By shunning Greek efforts to find an alternative economic lifeline, the ECB, the International Monetary Fund, and other eurozone debt holders risk the election of parties like Syriza throughout Europe. This political trend could cripple the eurozone and threaten the economies of countries like Germany that are, for now, fiscally and financially stable. While there is a chance that this early rebuttal will discourage the election of parties running against unpopular austerity measures with the knowledge that their political promises are unsustainable, it is not worth the economic peril of getting it wrong.

Moreover, it is clear that the current policies of austerity have not worked; in fact, the burdens have instead slowed positive economic development. Creditors demand Greece produce an annual surplus of 4.5 percent its gross domestic product. This is a significant requirement on a floundering economy that may be impossible to meet, as the continued loaning of eurozone cash for Greek deficit payments only adds to the overall Greek debt. For Greece, this obligation has done more harm than good.

Mr. Varoufakis proposes reducing the GDP surplus requirement to between one and 1.5 percent. Mr. Schauble and other debt holders should accept this proposal and devise new policies to confront what is becoming another economic crisis. Although one to 1.5 percent growth is still anemic, it is sustainable despite Greece’s dire situation. It would also send a positive message to countries such as Spain, Italy, and Portugal, who view draconian austerity measures as an economic death sentence rather than a saving grace. Simply lending Greece another seven billion euros rather than devising the new policies necessary to strengthen the European economy is unwise. Stronger European economies, like Germany, and the ECB must provide fiscal or monetary stimuli to generate growth and employment throughout the eurozone. If they succeed, the rising tide will lift all boats.