Greece may not be able to repay its enormous current debts – leaving debt holders to take their lumps – but it is undertaking reforms that decisively break with its past as perhaps the most mismanaged economy in Europe.
Standard market-oriented structural reforms are now being unleashed across the weak periphery of the euro. Previously politically toxic increases in the retirement age are now happening in Greece, Portugal, Spain, and France; labor markets are being liberalized; closed-shop industries are opening up to competition; and state-owned assets are up for privatization.
Tough structural reforms rarely deliver improved economic performance in the short term. But already the euro area’s aggregate government deficit is less than half that of the US federal government, a significant improvement from when the European crisis started. When combined with the aggressive austerity measures adopted in Europe since the beginning of the crisis, these structural reforms will raise growth rates over time.
Today’s crisis will thus provide crucial impetus for addressing Europe’s long-term demographic and economic challenges.