05/01/2015
by Paul De Grauwe.
The Greek debt crisis that
erupted in 2010 is back and again threatens the stability of the Eurozone. That
crisis was the result of two factors. First, an unbridled spending drift of
both the private and the public sectors in Greece during the boom years of
2000-2010, which led to unsustainable levels of debt. Second, reckless lending
to Greece by Northern Eurozone banks. At no time the Northern bankers asked
themselves the question of whether the Greeks would repay the loans.
The European Union chose to
resolve the debt crisis by punishing the Greeks and by saving the Northern
banks. A punitive austerity program was imposed on Greece, whose effects are
now visible everywhere in this country. A decline in GDP of close to 25% since
2010, a rise in unemployment to a level we have not seen since the nineteen
thirties, and impoverishment of large parts of the Greek population.
The banks went largely
unpunished. True there was a restructuring of the Greek debt held by private
investors. Some banks paid the price of excessive credit granted to Greece, but
most banks escaped this fate by dumping their Greek claims onto the public
sector. Those claims are now in the hands of national governments and the
European Central Bank. And these want to have their money back whatever the
consequences may be for the Greek people and the Greek political system.
The official narrative of this
approach is that the intense austerity that was imposed on the Greek
population is inevitable and in the end will bear fruit. Inevitable? Yes,
of course, if the intention is to safeguard the interests of the creditors then
there is indeed only one possibility: the Greeks have to pay the full
price. Will it pay off in the end? Yes, of course if austerity is
maintained long enough it will succeed in creating surpluses and transfers of
resources from Greece towards the rich North of the Eurozone.
This narrative, however, loses
sight of the political upheavals triggered by the human misery that results
from intense austerity. The millions of people who are pushed into misery by
the creditors from the North of Europe are not passive subjects. They not only
protest in the streets, something the creditors can easily live with. They also
vote for those political parties that promise them that there is a better way
to deal with the problem. And these are the parties that are out to break the
established political and social order.
It is appalling to see that
the European political elite has been living in a cocoon, failing to take into
account the political and social implications of the intense austerity programs
they imposed in countries like Greece (but also in other countries of the
periphery). This political elite still has not learned the lessons. The first
reaction of the German minister of finance after the announcement of new
elections in Greece was that the discipline needed to be continued rigorously.
What is to be done? Much will
depend on the election results in Greece. The far-left party, Syriza, seeks to
weaken the intensity of the austerity programs and to negotiate a debt
restructuring with the European authorities. It is quite surprising to
find out that these demands, in fact, are based on a correct analysis of the Greek
problem. Despite the austerity, that has been extraordinarily intense, the
Greek public debt has increased and now exceeds 170% of GDP. The burden of this
debt is so high that future Greek governments will not be able to continue to
service it.
Instead of denying this
reality the EU finance ministers should start facing it. They should begin to
think about how they can ease the debt burden of Greece. Denying this reality
condemns Greece to many more years of misery and will encourage extremist political
movements in the country even further.
The risk today is that the
political leaders of the Eurozone refuse to relieve the Greek debt (and that of
other countries of the periphery). In that case, a fundamental crisis in the
Eurozone is inevitable. Even if Syriza does not make it at the coming election,
extremist parties will gain the upper hand in future elections. This will be
very disruptive for the Eurozone as a whole.
History teaches us that after
a debt crisis a balance must be found between the interests of creditors and
debtors. The unilateral approach that has been taken in the Eurozone in which
the debtors have been forced to bear the full weight of the adjustment almost
always leads to a revolt of these debtors. That is now underway in Greece. It
can only be stopped if creditors dare to face this reality.
This column was first
published on Paul
De Grauwe’s Blog
