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5 Easy Ways to Solve the Greek Crisis

If, that is, the economists were in charge.

If there's one thing economists don't like, it's politics. We can draw up any number of fantastic policies on paper, but getting them through legislatures and central bank committees is another story. Politics has been a big part of the problem in Greece. Not only are the politicians there incapable of choosing a way out of the fiscal crisis they created; they can't even form a government. But what if economists were in charge?

With politicians pushed aside, economists could offer at least five paths, some of them not mutually exclusive, out of Greece's current straits. Here's how they would work.

1. Default officially. Greek bonds have been trading at huge discounts for months now, and negotiations to reduce the Greek government's debts have been running non-stop behind the scenes. Puzzlingly, however, the government has continued to pay all the interest owed to select groups of creditors. An official default would allow Greece to go through a more orderly sort of bankruptcy process, determining the "seniority" of various claims -- basically, which ones get paid first -- and then negotiating with creditors while payments remained frozen. Afterward, Greece would have a hard time borrowing from global credit markets for some time, perhaps several years. Its leaders would have to form a durable government, which in turn would have to demonstrate the ability to spend responsibly in order to win back the markets' confidence.

Sounds tough -- but by no means impossible. Many countries in Latin America managed to return to global credit markets within a few years of defaults in the 1980s and 1990s. Others have taken their time. Argentina has had a rocky relationship with its creditors since defaulting on its debts in 2001, and recent discussions about returning to the markets have been soured by the renationalization of energy company YPF and fears about inflation and budget deficits. Of course, Argentina's commodity wealth has allowed the country to grow quickly without the markets' help for a decade since the crisis; resource-poor Greece might not be so lucky.

2. Drop the euro. The euro is a huge obstacle to Greece's return to fiscal health. In a country with its own currency, a government can use inflation to reduce the value of its debts relative to its tax revenue. Issuing more currency makes prices and wages rise, but the amount owed to debtors stays the same. The Greek government can't issue more euros, however; only the European Central Bank can. Nor can the Greek government depress the value of its currency to help its exports, a common strategy for hastening an economic recovery.

A return to the drachma would put the tools of monetary policy back in Greek hands. It would almost certainly lead to a default, too, since the government would have a hard time putting together enough depreciated drachmas to pay its euro-denominated debts. But after an initial scare, the country would be well equipped for future growth. Tourism and other exports would undoubtedly benefit from having a flexible currency, as would purchases of Greek assets by foreigners.

3. Raise taxes. At the moment, the Greek government's revenue is about 42 percent of GDP. That's a middling-to-low figure for the euro area, where the IMF predicts that Belgium, Finland, and France will all top 50 percent this year. Raising tax rates and improving tax collection could bring the government's revenue more in line with its spending and eventually balance the budget.

Fans of the Laffer Curve might argue that raising tax rates wouldn't necessarily result in higher revenue. But, experienced and skilled as the Greeks appear to be in avoiding taxes, there's evidence that the country is still on the left-hand side of the Laffer curve. In fact, a recent study suggests that Greece could enhance its revenue by up to 5.6 percentage points of GDP before the curve started to slope downward.

4. Cut spending. The Greek government has come under enormous pressure to cut spending in exchange for EU and IMF bailouts. Right now, the budget deficit is still about 7 percent of GDP and on track to stay around 5 percent in the long term. That's already a lot lower than the 11/10 percent figures of two years ago. Like them or not, more cuts would finish the job.

Of course, cuts could also hamper the Greek economy's recovery by doing away with government jobs and spending in other areas. With such little confidence in Greece amongst investors and corporate managers, it's hard to believe the private sector would instantly fill the gap. Cuts would end the fiscal crisis, but not the broader economic one; stagnation in Greece could drag on for several more years as a result.

5. Liquidate. Though a small country, Greece has a lot of valuable stuff. Its monuments are recognized around the world. Its countryside and beaches are beautiful. Its museums are filled with the riches of early Western civilization and some of the East as well. And for a small country, it has a lot of fancy embassies and consulates dotting the globe, not to mention the snazzy military hardware it has bought at a higher rate than China. All of these assets can be sold, and indeed some of them already have been. But there's a further step -- selling the country.

When a company goes bankrupt, its creditors have the option of chopping it up into pieces to recoup their debts and claim their shares. Greece could do the same, offering all or part of itself to other countries in Europe and beyond. Along its northern and western edges are large, ethnically Albanian, Macedonian, and Turkish communities that have occasionally been the subject of extraterritorial claims by groups in neighboring countries. These countries might be willing to pony up a lot of cash in return for a change in Greece's borders. Foreign billionaires who enjoy their Mediterranean holidays might also be persuaded to pick up an island or two. There's plenty of precedent for cash-for-land deals -- Seward's Icebox, anyone?

More likely, the threat of liquidation would encourage Greek voters to consider the other four options more seriously. But that's a ploy for politicians.

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Argument

Stop Ignoring Taiwan

With China on the rise, now is the time to renew Washington's relationship with Taipei.

America's modern China policy has been extraordinarily successful. Formulated between 1972 and 1982, it's embodied in the Three Joint Communiqués and the Taiwan Relations Act, which officially recognized the People's Republic of China as China's government and articulated U.S. interests in Taiwan's security. The policy has provided a time-tested framework for the United States to interact with China as it has climbed the development ladder to become the world's second-largest economy, and it has kept the United States committed to the maintenance of stability across the Taiwan Strait.

With a three-decade demonstrated track record, the adage, "If it isn't broke, don't fix it," would seem sound policy advice. Yet policy machinery does require periodic maintenance. America's relationship with Taiwan, an important component of the United States' China and Asia-Pacific strategy, needs a tune-up and perhaps some part replacements in the areas of security, trade, and diplomacy.

It's difficult to overstate the progress in cross-strait relations, and in Taiwan itself, over the last four decades. I first went to Taiwan as a West Point cadet in 1971, and visited its island garrison of Kinmen, close to the mainland. I observed People's Liberation Army (PLA) and Taiwanese forces blaring propaganda insults across the narrow body of water that separated them. (At its closest point, Kinmen is less than a mile and a half away from the mainland.) The scene of major air battles between mainland China and Taiwan, Kinmen absorbed nearly half a million PLA artillery shells over 44 days in 1958.

When I returned to Kinmen in March, I stopped by a shop where a local entrepreneur named "Maestro" Wu Tseng-dong fashions knives from the steel of the dormant PLA shells that once blanketed the island.  A large number of his clientele that afternoon were mainland Chinese tourists who were in essence buying back their army's own expended ordnance.

Taiwan, the world's 18th largest economy, boasts an impressive history of domestic accomplishments. It is one of very few nations to have transitioned from authoritarian rule to democracy and from poverty to prosperity. It now accounts for more trade in goods with the United States than India does. And it provides a model of political reform for China, which even Prime Minister Wen Jiabao admitted is needed when he called for pressing ahead with "both economic structural reform and political structural reform" in March.

All the good news may have led to disinterest in Taiwan in favor of its bigger neighbor across the strait, but there are facets of the U.S.-Taiwan relationship that must be addressed: the bilateral inability to address a dysfunctional arms sale process, Taiwan's insufficient investment in its own defense, lack of progress on trade caused chiefly by a dispute over the safety of U.S. beef imports, and America's inadequate official contact with a major Asian power.

The argument that the United States should abandon Taiwan altogether by gradually phasing out arms sales has been convincingly dismissed in these pages and is unlikely to become policy. But the current policy drift bears more subtle costs at precisely the time the United States should be strengthening its existing partnerships in the Asia-Pacific. There is already troubling evidence that U.S. allies in the region are hedging their bets, skeptical that the United States will meet its commitments, and wary of China's rising military power. American actions toward Taiwan matter to U.S. alliances elsewhere. This is true even beyond the Asia-Pacific as the United States withdraws from Afghanistan amid promises to remain engaged there.

The United States should simplify the inefficient and unpredictable process by which it sells military hardware to Taiwan. Currently, Taiwan's legislature appropriates funds for weapons programs with no guarantee the United States will approve the sale; conversely, the United States approves a sale with no guarantee that it will eventually transfer the hardware. The four main players -- the executive and legislative branches of both the United States and Taiwan -- should collaborate and attempt to put in place a more predictable and credible process.

At the same time, the United States should encourage Taiwan to invest more in its own security. President Ma Ying-jeou has promised Taiwan will spend 3 percent of GDP on defense but has taken no meaningful steps toward that goal -- Taiwan spent only 2.1 percent of its GDP on defense in 2010. Even while Taiwan's neighbors are increasing their defense budgets in the face of a rising China, Taiwan -- to which China's military rise poses the most direct threat -- appears over-reliant on the United States and is under-investing in its defense.

The U.S.-Taiwan trade relationship is similarly unnecessarily complicated. Beef, although it accounts for less than 1 percent of U.S. exports to Taiwan, has become a huge political issue in the bilateral relationship. The controversy originated when Taiwan imposed harsh restrictions on the import of U.S. beef after the discovery of a case of mad cow disease in the United States in 2003. While most restrictions have since been lifted, an additive used in U.S. beef remains the subject of bitterness and popular protest in Taiwan. Partly as a result, the United States and Taiwan have not held high-level bilateral trade talks since 2007. The Taiwanese people debate the issue daily; a growing number are in essence calling Americans bullies for blaming them over the impasse. The United States can do more to reassure Taiwan about the quality of its beef by working collaboratively to develop screening and quarantine procedures. This dispute should no longer overshadow what remains an important trading relationship.

Finally, there is work to do on the diplomatic front. The United States does not recognize Taiwan as a formal state, and Taiwan cannot be called an "ally" of the United States except in the sense of a close friend. Taiwanese Air Force pilots may be U.S.-trained to fly U.S.-made F-16s, but the United States remains committed to the One China Policy. The United States has no embassy in Taipei -- though the staff size of its de facto embassy, the American Institute in Taiwan, is roughly equal that of the embassy in Seoul -- and sharply restricts high-level official visits. U.S. Veterans Affairs Secretary Eric Shinseki had to decline an invitation to Taiwan in 2009 because of his cabinet-level status; I couldn't return to Taiwan in an official capacity after being promoted to brigadier general, and only did so this year after retiring from military and government service in 2011. Taiwan's Defense Minister, Kao Hua Chu, has yet to visit the United States after holding the post for two years. The highest-ranking U.S. official to visit Taiwan in the past decade was Deputy Secretary of Energy Daniel Poneman, who made the trek in late 2011.

The United States' lack of military-to-military and high-level diplomatic contacts with a key regional player -- on whom the Asia-Pacific's stability in no small part depends -- undercuts the purpose of the 2013 Pentagon fiscal priorities announced in January to increase "American commitment" to that that part of the world. The United States should at the very least publicly reexamine this policy in light of its costs. In the short term, the United States should expedite Taiwan's inclusion, currently under review, in the Visa Waiver Program, which allows travelers from 36 countries to travel to the United States for business or tourism without a visa.

The U.S.-Taiwan relationship faces growing risk from complacency on both sides as each increasingly takes the other for granted to focus instead on "getting it right" with mainland China. Now, the United States has a brief window of opportunity to get an important friendship back on track. This fall, the Chinese Communist Party undergoes its first transition of leadership in nearly a decade.  I anticipate the newly chosen Politburo to be more inward-looking and risk-averse over the next two years as it moves to consolidate power. The timing coincides with the House of Representatives' expected reexamination of Taiwan policy legislation this spring. The U.S. should use the opportunity to correct emerging problems in its relationship with Taiwan, before things break and costly fixes are needed.

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