Growth, not debt write-off, is the key

 Efforts of Greece and creditors should be focused on expanding the country’s economy in the long term

By Dimitris Kontogiannis

Greece has surprised many pundits by achieving a bigger-than-estimated primary budget surplus last year but it has a long way to go to reach a much higher level consistent with sustainable debt.

However, relying on fiscal orthodoxy to bring the debt ratio down to Maastricht levels is a risky route. It is not favorable to growth and is vulnerable to external and internal shocks – as recent political developments have demonstrated. Therefore, the government and the eurozone creditors should come up with a credible plan to boost economic growth in the medium term and deal more effectively with the debt overhang. Germany and Chancellor Merkel could play a constructive role to this extent.

It is not easy but it is possible for the Greek gross general government debt ratio to be reduced to a targeted 124 percent of GDP in 2020, as envisaged by the finance ministers of eurozone members in November 2012, from more than 170 percent last year. It requires that Greece attains a primary surplus of around 4 to 4.5 percent of GDP in 2016 and keeps it around that level for several years.

Having state revenues exceed spending, excluding interest payments, by about 9 billion euros in 2016 and beyond is a tall order. That said, last year’s 2.5- to 3-billion-euro surplus indicates it is possible, even if one takes out one-off items, given the GDP contraction by a revised 3.9 percent.

It should be noted that the 2013 figure does not include money spent for the recapitalization of Greek banks. There is another way to look at it by focusing on the primary balance adjusted for the ups and downs of the economy, the...