Paul Krugman: Germany would be crazy to reject Greece’s proposal

krugmanIn an article titled “Who’s Unreasonable Now?” Paul Krugman, one of the world’s best known and most acclaimed economists, comments on the recent political developments in Greece and the Greek government’s decision to put an end to the ”debt haircut” chorus.

Writing for the Times, Krugman states that Germany would be crazy to reject Greece’s new proposal with regard to the country’s debt. This proposal, as described by the famous economists, involves “substantive but not outrageous relief from the burden of running primary surpluses … reducing the amount of resources transferred to creditors from 4.5 to 1-1.5 percent of GDP” and, at the same time, asks for “flexibility to achieve these surpluses with a mix that includes more revenue and less spending austerity.”

According to Krugman, this proposal is completely reasonable. More specifically, the economist says that since “everyone is aware that Greek debt can’t be paid in full in the sense that Greece eventually runs primary surpluses equal in present value to the headline debt number,” the manner in which this reality is represented doesn’t really matter.

“As I‘ve argued, the key point is to grant Greece some relaxation — but not elimination — of the requirement that it run large primary surpluses, thereby creating room for recovery. And that’s what Greece is now asking for,” says Krugman.

In fact, he goes as far as to say that the German Government would be crazy to reject this proposal out of hand. “If the German position is that debt must always be paid in full, no relief in substance even if it manages to avoid debt write-offs on paper, then that position is basically crazy, and all assertions that Germany understands reality are proved wrong,” Krugman underlines.