4. Greece and sustainability of Government debt. (Total: 10 Points). In the summ

Question

4. Greece and sustainability of Government debt. (Total: 10 Points). In the summer of 2017, the European Union and the Greek government reached an agreement to continue with the disbursements of the bailout plan approved earlier. The IMF, who is also part of the negotiations, has expressed concerns about the agreement as it believes that Greek debt continues to be unsustainable and a further debt reduction is necessary. When comparing the assumptions made by the European Union and the IMF about macroeconomic scenarios for Greece one can notice several differences. The European Union assumes nominal GDP growth of 3.2% while the IMF assumes 2.8%. When it comes to the potential primary surpluses that Greece could generate in the future, the European Union assumes that the government could generate primary surpluses of 3.2% until 2020 and 2% afterwards. The IMF assumes that only 1.5% is reasonable. a) How do those assumptions can lead to different conclusions regarding sustainability of government debt? (5 points) b) If the European Union were to accept the assumptions of the IMF, what are the two potential ways in which debt sustainability can be restored? (5 points)

Explanation / Answer

A) IMF has proposed certainly small reachable targets which could be achieved by the nation who is in great debt. Whereas, looking at the situation, the assumptions of EU are quite high. Unreachable goals could prove to be really bad for the economy, leading to even more debt as it may require even more debt relief to tackle the situation.

B) debt sustainability could be restored as :-

1) by following small target, greece may find its optimal potential and ways to produce more

2) there won't be any need of debt relief.

B)  

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