The two are logically distinct--and practically distinct as well. The first is largely settled. The second is not. But the second must be done: nobody is going to lend Greece large amounts of money in the future, so if it does not balance its government finances and its current account, the market will balance them for us in ways we really will not like.
The Logic and Fairness of Greece’s Program: To get back to health, Greece needs two things. First, a lower debt burden. Second, improved economic competitiveness. The new program addresses both….
Debt had to be restructured. The process was long and messy. After all, bargaining between creditors and debtors is rarely a love affair. In the process, foreign creditors were often vilified in Greece as bad guys—rich banks, who could and should be willing to take a hit…. [T]he PSI (private sector involvement) deal—the largest ever negotiated write-down of public debt—has reduced the debt burden of every man, woman, and child in Greece by close to €10,000 on average, a sizable contribution on the part of foreign savers.
That is the first.
Now for the second:
Greece now has to do its part―with sustained political commitment to implement the difficult but necessary set of fiscal, financial, and structural reforms that have been agreed as part of the program supported by Greece’s partners in the eurozone and the IMF…. [I]t has to bring down its fiscal deficit further. Otherwise, this will simply negate the progress which was just made on the debt. The fiscal effort which has been accomplished already is truly impressive, with the primary deficit coming down from 10 percent to less than 3 percent…. Equally, or perhaps more importantly, Greece has to reduce its current account deficit…. And Greece still has a very large current account deficit, at close to 10 percent of GDP, despite the depressed level of output…. [T]he country has to become more competitive, sell more abroad, and buy less from abroad. At the moment, Greece’s exports amount to only about 14 percent of the goods it produces…. There are two ways to become more competitive: become much more productive, or reduce wages and nonwage costs. The first way is much more appealing. But there is no magic wand…. This leaves decreases in relative wages, at least until higher productivity can kick in. In countries with flexible exchange rates, this can be achieved through currency depreciation. In a country which is part of a common currency area, it has to be achieved by decreasing nominal wages and prices….
The best way forward would have been a negotiation between social partners to reduce wages and prices, and avoid a long and painful process of adjustment. This did not happen. The program tries to accelerate the process, while protecting the most vulnerable. The harsh reality is that the adjustment has to take place one way or the other; otherwise competitiveness will not improve, demand will not increase, the current account deficit will continue, and unemployment will remain very high. The faster it does take place, the less pain there will be….
[T]he notion which is sometimes floated that large infrastructure projects might boost growth… is fanciful…. What about leaving the Eurozone? Euro exit followed by a sharp depreciation could achieve the relative wage and price decline that Greece needs, and achieve it faster…. Indeed, if Greece had had its own currency to start with, this would surely have been part of the program. But Greece is part of the Eurozone. And, leaving aside the large costs of no longer belonging to the Eurozone, the dislocations from a disorderly exit—from the collapse of the monetary and financial system, to the legal fights over the proper conversion rates for contracts—would be very, very large…
But are the costs of staying in the eurozone even larger? I suspect they are. If northern Europe wants to keep Greece in the eurozone, it ought to pay more--staying in the eurozone delays Greece's adjustment and makes balanced trade and government finances much more painful, and those costs should not rest on the Greeks.