The German idea of sending Athens a 'budget commissioner' was daft. Berlin itself could not tolerate such interference in its fiscal sovereignty (the constitutional court would never allow it). But to restrict such budgetary oversight to Greece alone would be disdainful and a political non-starter. The idea predictably caused outrage in Greece. Chancellor Angela Merkel has quietly dropped the proposal but the underlying problem persists: Greece's donors - not only Germany but also other EU governments and the IMF, no longer trust Greek politicians to turn their country around.
Greece desperately needs a deal on a new bail-out package before March 20th when €14.4 billion in debt repayments are due. The IMF and eurozone governments insist that new money will only be forthcoming if there is a realistic prospect of Greek debt becoming sustainable in the foreseeable future. The IMF says that 'sustainable' would mean a debt level of 120 per cent of GDP by 2020 - although most economists think that 60-80 per cent is the most that a weak economy like Greece could cope with.
Even to reduce the debt level to 120 per cent from the current 160 would require a deep cut in existing debt, more fiscal austerity, lots of further outside help and a return to economic growth. Media attention has focused on the debt restructuring talks between Athens and it private creditors. But for Greece's future prospects, the question of whether bond holders get 3.8 per cent or 4 per cent interest on their restructured portfolios is insignificant compared with the much bigger question of whether and when Greece emerges from its devastating recession.
There is now broad agreement among eurozone donors and the IMF that Greece will not be able to squeeze more revenue out of an economy that is in its fourth year of recession. The IMF forecasts GDP to fall by a further 3 per cent this year but private sector forecasters, such as the Economist Intelligence Unit, think that the economy may contract at twice this rate. In 2010, Greece went through the most savage austerity programme ever implemented by an OECD country. Yet the budget deficit at the end of 2011 stood at around 10 per cent of GDP, so adding to the already unsustainable level of debt.
The emphasis of Greece's negotiations with the troika (IMF, ECB and European Commission) has shifted to structural reforms designed to boost growth. The good news is that there is lots of room for improvement: by many measures, Greece is the EU's least efficient economy. The National Bank of Greece has calculated that a comprehensive reform package could boost the annual growth rate by 1.5 per cent over the medium term, although the OCED thinks an additional 0.5 per cent is more realistic.
The previous government of George Papandreou started making headway in various areas, for example by removing some of the protection enjoyed by truckers, lawyers, pharmacists and 140 other 'closed shop professions', by simplifying licensing procedures, making life easier for small businesses or giving workers and their bosses more wiggle room to set pay and conditions in Greece's over-regulated and union-dominated labour market. Papandreou's technocrat successor, Lukas Papademos, has continued along those lines.
