As we mentioned earlier, leaving the Euro is not a realistic policy. So how does Greece deal with its economic crisis? How does it cut its debt and return the economy back to strong economic growth?
The immediate answer which springs to mind - is with great difficulty.
Unfortunately, Greece has no recourse to any real loosening of monetary policy. They can't devalue the exchange rate, they can't pursue an independent policy of quantitative easing, they can't leave the Euro.
Yet, at the same time, bond market pressure is forcing them to cut their budget deficit - just at a time when the economy needs fiscal policy to provide a boost in aggregate demand not a tightening.
One solution that springs to mind, is to cut public sector wages, and cut the bloated Greek civil service. This spending cuts would provide the markets with clear evidence of sincere efforts to tackle the budget deficit. But, if (and it is a big if - given political situation) the Greeks were able to cut wages there would be negative impact on output and spending.
Certainly the cut in government borrowing is desirable, if not necessary from a fiscal point of view. But, the cut in wages and rise in unemployment would reduce Aggregate Demand and worsen the recession. Greek GDP fell 1.5% in 2009. There is a danger this could be much worse this year.
It is one thing to cut public sector employment, but, it is hard to see job creation in private sector.
Greece along with Spain are suffering from a lack of competitiveness - indicated by size of current account deficit. To boost competitiveness would require a prolonged set of measures to tackle wage inflation, boost competitiveness, encourage innovation, more flexible labour markets e.t.c. It's easy to talk about 'increasing competitiveness' but in the real world to actually achieve improvements in competitiveness requires significant time, effort and political will.
I certainly wouldn't like the job of Greek finance minister. There is an element of having to grin and bear it. Hoping that despite austerity measures, the economy will somehow bounce back and return to positive growth. It will be interesting to see how the Irish economy fares. So far they have been relatively successful in tackling the budget deficit. Hopefully, they may provide a model for an economy cutting the deficit and being able to return to positive growth.
There is no quick or easy fix. I would suggest that borrowing from IMF or EU would be a good step for Greece. It would help to minimise the impact of deflationary fiscal policies at a time when they have very few alternatives.