Greece's Euro Future and U.S. Policy

A Narrow Path Forward

July 29, 2015

Testimony
Testimony by CFR fellows and experts before Congress.

In his testimony before the Senate Committee on Foreign Relations' Subcommittee on Europe and Regional Security Cooperation, Robert Kahn argues that although Greece's direct trade and financial links to the U.S. economy are small and there is less of a direct systemic threat to the United States than when the crisis began in 2009, the risks are still material. What happens in coming days and months can have dramatic consequences for Europe and for the global economy.

People line up outside a National Bank branch.

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Takeaways:

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  • The plan between Greece and its official creditors is a framework for a deal, not a deal itself, with many details still to be negotiated. Greece in the past two weeks has passed significant reforms of the tax, judicial, and banking systems, but there is a long road ahead and there will be political and economic challenges well beyond anything this or previous Greek governments have been able to manage.

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  • Any program that keeps Greece in the eurozone is going to be expensive. The agreement envisages a financing gap of 86 billion euros over the next three years, of which a little more than half goes to meeting debt service. The rest would allow for fiscal financing, elimination of arrears, and a comprehensive fix of the banking system. But the amount is likely to grow, due to inevitable slippages and a rising bill from the recent banking system closure.

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  • European debt remains a critical hole in the international financial architecture. There is a policy for private sector involvement, and there is the Paris Club for developing countries. But the debt overhang in Europe has become a destabilizing force.

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  • It is important to recognize that any International Monetary Fund (IMF) program contains risks. It will need to provide exceptional access, and even with debt relief it will not meet the test of "high probability of debt sustainability" required under IMF rules. Pragmatism will be needed.  As in 2010, a strict rules-based approach could be equivalent to forcing Greece out of the eurozone.

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  • The rapid growth of financial markets and greater integration into the global economy by large developing countries offer important possibilities for development and growth. However, when crises do occur, the financing needs are large relative to the resources the Fund has at hand. This is causing increasing conflict between official creditors and, when gaps emerge, forces restructuring. These tensions will only grow in coming years. From this perspective, it is critically important that we work to modernize the IMF.  And we cannot achieve this objective unless IMF quota reform is passed.

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  • We have a shared interest with our European partners in establishing a Greece—inside or outside the eurozone—that is competitive and growing. We also have a strong interest in a cohesive and economically prosperous Europe.  What happens in the coming months could go a long way to addressing these concerns.

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