It should be clear that austerity without growth-boosting investment does not work in reducing debt

The failure to save Greece from becoming the first advanced economy to default on an IMF loan lays bare not only the extreme difficulties for the country and its creditors to find a way out but also the looming menace of widespread overleveraging to the fragile global recovery.

It is high time for responsible leadership from both European policymakers and major counterparts around the world to work together in dealing with rising debt problems that more and more debtor countries find increasingly hard to cope with.

The Greek economy has contracted by more than 25 percent since the worst global financial crisis in more than seven decades broke out in 2008. To stay afloat, Greece received nearly 240 billion euros ($266 billion) in two bailouts from the European Union and IMF at a high cost to its population, which has absorbed cuts to pensions, wages and public services.

After five months of acrimonious negotiations that have eroded trust between Athens and other European capitals, the sudden escalation of the Greek debt crisis triggered by a planned July 5 referendum in Greece on the latest creditor offer finally pushed the country to miss its IMF payment at midnight on June 30.

The situation puts Greece on a potential path out of the eurozone, the EU's grand project to bind countries through a single currency.

Both the short-term impact and the long-term consequences for the rest of European and global financial markets are hard to predict.

For those who play down the seriousness of a Greek exit since its debt is held mainly by governments, the IMF and the ECB, which can absorb the hit if it happens, they are either underestimating or simply ignoring the real danger of contagion to other heavily indebted countries in urgent need of painful but necessary reforms.

And the shock wave that the Greek crisis sent through global stock markets on June 29 should have made clear the huge uncertainties it poses for global financial stability and economic recovery.

At a moment when it has become increasingly obvious that easy money across the world is failing to boost growth, a Greek debt crisis that turns uglier than expected would be the last thing global policymakers want to see.

While bracing for the worst-case scenarios, European policymakers and their counterparts around the world should have a close review of their approach to dealing with sovereign debt problems.

It seems that a basic lesson that the international community should draw from the Greek crisis should be that austerity without growth-boosting investment is not an effective way to reduce the debt burden.

If policymakers from both the EU and Greece are to figure out a liability-sharing deal to arrest the crisis from deteriorating, they should focus on not only the austerity terms of continued international aid but more importantly a workable and comprehensive development plan to secure the viability of the Greek economy, growth and social cohesion.

For instance, European Commission President Jean-Claude Juncker's plan to revive the European economy and, in particular, large infrastructure projects as well as China's Silk Road Fund, tasked to improve infrastructure connectivity between Asia and Europe, are all important resources that countries like Greece could aggressively tap into to help grow their economies out of debt.

Chinese Premier Li Keqiang made it crystal clear during his recent visit to Brussels that, as a major customer and supplier for the 28-nation EU, and a long-term holder of eurobonds, China is in favor of a united and prosperous EU, as well as a strong euro.

Sitting on foreign exchange reserves of about $4 trillion, China is set to become a major exporter of capital in the coming decade. Therefore, Chinese investors will definitely take note of what is happening in Greece.

It is hoped that negotiations between Greece and its international creditors will go beyond a zero-sum game to design a long-term plan that better balances austerity and growth-boosting investment for the benefit of all.

The author is a writer with China Daily. Contact the writer at zhuqiwen@chinadaily.com.cn

(China Daily European Weekly 07/03/2015 page11)