Barry Eichengreen: Europe should look back to help Greece move forwards

Even after a year of excruciating spending cuts, the budget deficit still exceeds 10 per cent of GDP. Residents don't pay taxes. The system of property registration is a mess. There is little confidence in the banks, and even less in the government and its policies.

Since the economy needs help, here's a novel idea: provide some. Now is the time for the European Union to come forward with its version of a Marshall Plan for Greece.

Rather than piling more loans onto the country's already unsustainable debt burden, the EU should offer a multi-year programme of foreign aid. The Greek government and donors would decide together the projects it financed - from building new solar and wind power-generating facilities to turn Greece into a major energy exporter, to updating its ports to make it a commercial hub.

Foreign aid and expertise could be used to modernise the property registration and tax collection systems. Funds could be used for recapitalising the banks and retiring some debt. They could help finance government support for the unemployed and elderly, who are among the principal victims of the financial crisis.

The EU should contemplate this option because, for starters, it bears more than a little responsibility for Greece's plight. It offered membership to a country with deep structural problems. It then accepted Greece into its monetary union with full knowledge that its fiscal accounts were not worth the paper they were written on. And it looked the other way when French and German banks recklessly enabled the Greek government's profligacy.

Second, the current strategy, which amounts to trying to get blood from a stone, is not working - there are limits to how fast a country can reform.

And finally, history suggests that a Marshall Plan for Greece might actually work. Recall the plight of the European countries that received aid from the United States after the Second World War. They had massive debts. Their budgets were deep in deficit. They exported little. Property rights were uncertain. Public support for governments grappling with these problems was fragile.

The Marshall Plan, by financing strategic investments, helped the recipients to ramp up their exports. Aid-financed reconstruction turned Rotterdam into a commercial hub for northern Europe. US aid underwrote the imports of coal and investments in hydroelectric power needed to get industry running again. And, in some cases, such as France, US funds were used to extinguish part of the public debt.

Importantly, these projects were neither dictated by the donor nor chosen by the recipient, but decided in collaboration.The recipient, moreover, had to put up matching ("counterpart") funds for each and every project.

A further condition for receiving aid was that the government had to follow through with macroeconomic stabilisation. But this was now politically feasible, because aid topped up the public coffers, reducing the depth of the necessary cuts and the associated pain and suffering. Support for the governments undertaking these reforms was correspondingly stronger.

Europeans might usefully look back 60 years, to a time when their own countries, perched on the brink of a similar collapse, received the help they needed to recover - help that has put them in a position to do something similar for Greece today.

• Barry Eichengreen is professor of economics and political science at the University of California, Berkeley