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Yesterday, John Taylor and I testified on the Greece crisis before the Senate Foreign Relations Subcommittee on Europe and Regional Security Cooperation. A summary of my testimony is here (including a link to my written statement), and the full video of our discussion is here. I continue to see Grexit as the most likely outcome, as we are at the very early stage of a complex adjustment effort that will face serious economic and political headwinds in Greece, and will be extraordinarily difficult to sustain. But whether Greece is ultimately better off in or out of the euro, a competitive and growing Greece is an objective the United States shares with our European partners.
A number of decisions concerning Greece will be made in the coming weeks that could be decisive in deciding Greece’s economic future. Specifically, I argued that (i) A European financing facility (ESM) on the order of €50 billion is needed to ensure that the IMF is not left with an unreasonably large financing gap; (ii) European creditors should give explicit commitments on debt relief (conditional on economic performance), in line with the recommendations of the IMF, and consideration be given to a "Paris Club" for Europe; and (iii) The recapitalization and restructuring of the banking system needs to be prioritized if growth is to be restarted. I also noted that the challenges in Greece highlighted the need for a sufficiently large and flexible IMF that can respond pragmatically in the face of hard-to-quantify risks. This makes it all the more important that the Congress rapidly pass IMF quota reform, and John and I discussed some ideas for getting this done.