U.S. stocks rallied Monday on news that a solution may finally be in the works to the financial crisis in Greece, but economists aren't ready to pop the corks quite yet.
Greek Prime Minister Alexis Tsipras, who came into office on an anti-austerity platform, offered a last ditch-compromise today to Greece's European creditors aimed at preventing his cash-strapped country from defaulting on its international debt and potentially being forced out of the eurozone. The creditors -- the European Commission, the European Central Bank (ECB) and the International Monetary (IMF) -- had been running out of patience with the country's insistence on restructuring its debt, but they received Tsipras' proposal positively.
However, it remains unclear if it will be accepted by the Greek parliament or creditor nations such as Germany. Marathon talks to resolve the crisis were held today in Brussels.
Greece is an economic basket case. Among its many problems is rampant tax evasion, an issue that Tsipras addressed in his proposal by calling for increased surcharges on earnings from middle-class and wealthy individuals, a hike in the sales tax and a new levy on corporations earnings more than 500,000 euros ($568,000). He also promised to address concerns that Greece's retirement system is overly generous because many people can retire at age 52 by phasing in an increase in the retirement age over the next few years.
"Most people are accepting that this proposal is a significant compromise by the Greek government. ... They have also recognized that time is short," said Erik Jones, director of European and Eurasian Studies at Johns Hopkins School of Advanced International Studies, in an interview with CBS MoneyWatch. Jones added that the question now is will the talk's progress "be fast enough to keep the wolves from the door."
Much work, however, needs to be done before the Greek proposal can serve as a basis for a lasting agreement with the country's creditors, according to American University professor Stephen Silvia.
"It's clear to virtually everyone that the Greeks are not going to be able to pay back everything they owe, so I think what we will see is an effort to come up with a more consolidated, comprehensive solution," Silvia told CBS MoneyWatch. "This is not it. What we have here now is an opportunity to buy some time, kick the can down the road (and) allow politics to readjust in both Greece and the major creditor countries."
If no agreement is reached by June 30, the Greek government will default on a 1.54 billion euro payment due to the IMF. Additional payments are due to both the IMF and the ECB later this summer. Worries are mounting that Greek banks may have to limit withdrawals because their liquidity is being backed by the ECB.
In an interview with CBS MoneyWatch, Mark Kuperberg, a professor of economics at Swarthmore College, argued that what's behind the crisis isn't debt as much as the economic concept of "moral hazard" -- the fear that a lenient solution for Greece will create a precedent.
"What it is really about is this fearful word 'moral hazard,' which I have come to believe over time is one of the most destructive concepts economics has ever come up with," Kuperberg said. He added that Greece's economy is so small that European officials could do whatever they wanted without worrying about the consequences for the region as a whole.
But in an effort to avoid moral hazard, Kuperberg said Europeans are "putting the screws to Greece in a really inhuman way (and) not recognizing the pain that Greece has gone through already and the things they have done."
"Say Greece were let off the hook, no one knows what's the probability that any other country would see that as an incentive to behave as Greece did," he noted. "I would say the probability of that is really extremely low."