Illustration by Bloomberg View
Illustration by Bloomberg View

The prospect of Greece leaving the euro is infecting markets again like a recurring case of the Spanish flu. As Greece’s international creditors begin talks in Athens, a few deep breaths and some perspective are in order.

Did anyone think Greece wasn’t still at risk of a euro departure? The election of a pro-euro government on June 17 did no more than avoid an instant Greek exit. The challenges that existed before the vote remain, and that was as clear in June as it is now.

The latest hyperventilation was triggered by an article in the German magazine Der Spiegel and comments from Germany’s Vice Chancellor Philipp Roesler. The Spiegel piece said the International Monetary Fund was ready to cut off Greek aid. Roesler said the idea of Greece leaving the euro had “long since lost its horror.”

Note that the comments came from Germany, just before the so-called troika -- the IMF, officials from the euro area and the European Central Bank -- went to Greece to press the new coalition government about its loan commitments. Note, too, that Germany’s ruling Christian Democratic Union on Tuesday disowned the overly sanguine comments by Roesler, the chairman of the Free Democratic Party, as Spanish bond yields soared and Moody’s Investors Service put German bonds on a negative outlook.

So instead of fixating on pre-negotiation posturing, let’s look at the Athens talks. These will focus on the budget cuts worth 5.5 percent of gross domestic product that Greece must come up with for 2013-2014, in order to get the next tranche of aid. They’ll also try to figure out how to meet existing targets, given that months of political instability have blown Greece off course.

Not that there has been no progress. Since labor market reforms were passed in February, the average wage set by newly signed contracts has fallen by 22 percent, according to Greece’s labor inspectorate. This is the kind of internal devaluation the IMF is trying to enforce to restore Greece to competitiveness. Greece has also reduced its deficit by about 6 percent of GDP since 2009, a big adjustment by any standards.

The problem is that at 9.1 percent of GDP, the deficit is still far from meeting the troika’s plan to reduce Greece’s unsustainable debt pile, from a whopping 165 percent of GDP to 120 percent. Prime Minister Antonis Samaras and the coalition have helpfully laid out changes they want made to the troika agreement. Now, the EU and the IMF need to figure out whether to ease the requirements and timetable -- or essentially force Greece out of the euro.

Some of Samaras’s ideas make good sense. The Greeks want to create installment payments, capped at 25 percent of income, for people who are hit with back tax claims. This seems logical -- few people can pay their entire annual salary on demand, even if they want to.

The government also wants to stir growth in tourism and agriculture by cutting the value-added tax on food catering services and farm supplies. And it wants to replace emergency property taxes collected on electricity bills with a more progressive regime.

These changes make sense, too, but not until the government has first pushed through Parliament an overhaul of the tax system. Tax evasion remains Greece’s most pressing debilitation; it’s politically impossible (and unreasonable) to ask Germans to fund Greek tax cuts while cheating goes unchecked.

Other requests by Samaras should be rejected, including one for flexibility to raise the minimum wage and restore collective bargaining. These changes would unravel essential labor market reforms adopted this year.

Most controversial is the coalition’s promise of no new public sector dismissals, despite a signed commitment to the troika to reduce the public payroll by 150,000 people. Neither side can afford to concede much on this issue. Yet 150,000 is a big number, and there should be grounds for compromise.

For the troika, as for the Greeks, there are no good outcomes here, only less bad ones. Samaras and the coalition are looking for at least two years of leeway to enact reforms and impose fiscal retrenchment gradually. According to analysts at EFG Eurobank Ergasias SA, that extra time would cost the troika 16 billion euros to 20 billion euros ($19 billion to $24 billion).

It’s worth a good faith effort by the troika to pay the money to create an achievable amended program. Samaras, for his part, will have to demonstrate with actions that Greece will, at long last, put in place demanded reforms, including the rapid privatization of state enterprises and the opening up of closed professions.

Whatever German Vice Chancellor Roesler may think, the risk of contagion from a Greek exit remains high, and the damage to Europe’s political project would be lasting. Compared with those costs, 20 billion euros is a bargain.

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