The endgame in Greece

Financial Mirror (Cyprus) - - FRONT PAGE -

Af­ter months of wran­gling, the show­down be­tween Greece and its Euro­pean cred­i­tors has come down to a stand­off over pen­sions and taxes. Greece is re­fus­ing to ac­qui­esce to de­mands by its cred­i­tors that it cut pay­ments to the el­derly and raise the value-added tax on their medicine and elec­tric­ity.

Europe’s de­mands – os­ten­si­bly aimed at en­sur­ing that Greece can ser­vice its for­eign debt – are petu­lant, naive, and fun­da­men­tally self-de­struc­tive. In re­ject­ing them, the Greeks are not play­ing games; they are try­ing to stay alive.

What­ever one might say about Greece’s past eco­nomic poli­cies, its un­com­pet­i­tive econ­omy, its de­ci­sion to join the eu­ro­zone, or the er­rors that Euro­pean banks made when they pro­vided its gov­ern­ment with ex­ces­sive credit, the coun­try’s eco­nomic plight is stark. Un­em­ploy­ment stands at 25%. Youth un­em­ploy­ment is at 50%.

Greece’s GDP, more­over, has shrunk by 25% since the start of the cri­sis in 2009. Its gov­ern­ment is in­sol­vent. Many of its cit­i­zens are hun­gry.

Con­di­tions in Greece to­day are rem­i­nis­cent of those in Ger­many in 1933. Of course, the Euro­pean Union need not fear the rise of a Greek Hitler, not only be­cause it could easily crush such a regime, but also – and more im­por­tant – be­cause Greece’s democ­racy has proved im­pres­sively ma­ture through­out the cri­sis.

But there is some­thing that the EU should fear: des­ti­tu­tion within its borders and the per­ni­cious con­se­quences for the con­ti­nent’s pol­i­tics and so­ci­ety.

Un­for­tu­nately, the con­ti­nent re­mains split along tribal lines. Ger­mans, Finns, Slo­vaks, and Dutch – among oth­ers – have no time for the suf­fer­ing of Greeks. Their po­lit­i­cal lead­ers tend to their own, not to Europe in any true sense. Re­lief for Greece is an es­pe­cially fraught is­sue in coun­tries where far-right par­ties are on the rise or cen­tre-right gov­ern­ments face pop­u­lar left-wing op­po­si­tion.

To be sure, Euro­pean politi­cians are not blind to what is hap­pen­ing in Greece. Nor have they been com­pletely pas­sive. At the be­gin­ning of the cri­sis, Greece’s Euro­pean cred­i­tors es­chewed debt re­lief and charged puni­tive in­ter­est rates on bailout funds. But, as Greeks’ suf­fer­ing in­ten­si­fied, pol­i­cy­mak­ers pressed pri­vate-sec­tor banks and other bond­hold­ers to write off most of their claims. At each stage of the cri­sis, they have done only what they be­lieved their na­tional pol­i­tics would bear – no more.

In par­tic­u­lar, Europe’s politi­cians are balk­ing at steps that would im­pli­cate taxpayers di­rectly. The Greek gov­ern­ment has asked Europe to swap ex­ist­ing debts with new debts to lock in low in­ter­est rates and long ma­tu­ri­ties. It has also re­quested that in­ter­est pay­ments be linked to eco­nomic growth. (It has no­tably not asked for cuts in the face value of its debt).

But debt re­lief of this sort vis-à-vis Euro­pean gov­ern­ments or the Euro­pean Cen­tral Bank has been kept off the ta­ble. Such mea­sures would likely re­quire par­lia­men­tary votes in coun­tries across the eu­ro­zone, where many gov­ern­ments would face in­tense public op­po­si­tion – no mat­ter how ob­vi­ous the need.

Rather than con­front the po­lit­i­cal ob­sta­cles, Europe’s lead­ers are hid­ing be­hind a moun­tain of pi­ous, non­sen­si­cal rhetoric. Some in­sist that Greece fin­ish its pay­ment pro­gramme, re­gard­less of the hu­man­i­tar­ian and eco­nomic con­se­quences – not to men­tion the fail­ure of all pre­vi­ous Greek gov­ern­ments to meet its terms. Oth­ers pre­tend to worry about the moral-haz­ard im­pli­ca­tions of debt re­lief, de­spite the fact that the coun­try’s pri­vate-sec­tor debt has al­ready been writ­ten off at EU in­sis­tence, and that there are dozens, if not hun­dreds, of prece­dents for restruc­tur­ing the debts of in­sol­vent sov­er­eigns.

Al­most a cen­tury ago, at World War I’s end, John May­nard Keynes of­fered a warn­ing that holds great rel­e­vance to­day. Then, as now, cred­i­tor coun­tries (mainly the US) were de­mand­ing that deeply in­debted coun­tries make good on their debts. Keynes knew that a tragedy was in the mak­ing.

“Will the dis­con­tented peo­ples of Europe be will­ing for a gen­er­a­tion to come so to or­der their lives that an ap­pre­cia­ble part of their daily pro­duce may be avail­able to meet a for­eign pay­ment?” he asked in The Eco­nomic Con­se­quences of the Peace. “In short, I do not be­lieve that any of these tributes will con­tinue to be paid, at the best, for more than a few years.”

Sev­eral Euro­pean coun­tries now seem con­tent to force Greece into an out­right de­fault and pro­voke its exit from the euro. They be­lieve that the fall­out can be con­tained with­out panic or con­ta­gion. That is typ­i­cal wish­ful think­ing among politi­cians. In­deed, it is the type of heed­less­ness that led US Trea­sury Sec­re­tary Hank Paul­son to let Lehman Broth­ers fail in Septem­ber 2008, os­ten­si­bly to teach the mar­ket a “les­son.” Some les­son; we are still dig­ging out from Paul­son’s mon­u­men­tal mis­take.

Sim­i­larly, Keynes watched in hor­ror as eco­nomic pol­i­cy­mak­ers blun­dered re­peat­edly in the years fol­low­ing WWI, through the up­heavals of the 1920s, and into the Great De­pres­sion of the 1930s. In 1925, Keynes crit­i­cised the in­sou­ciance of those “who sit in the top tier of the ma­chine.” He ar­gued “that they are im­mensely rash in their re­gard­less­ness, in their vague op­ti­mism and com­fort­able belief that noth­ing re­ally se­ri­ous ever hap­pens. Nine times out of ten, noth­ing re­ally se­ri­ous does hap­pen – merely a lit­tle dis­tress to in­di­vid­u­als or to groups. But we run a risk of the tenth time…”

To­day, Greece’s Euro­pean cred­i­tors seem ready to aban­don their solemn pledges on the ir­re­vo­ca­bil­ity of the euro in or­der to in­sist on col­lect­ing some crumbs from the coun­try’s pen­sion­ers. Should they press their de­mands, forc­ing Greece to exit, the world will never again trust the euro’s longevity. At a min­i­mum, the eu­ro­zone’s weaker mem­bers will un­dergo in­creased mar­ket pres­sures. In the worst case, they will be hit by a new vi­cious cir­cle of panic and bank runs, also de­rail­ing the in­cip­i­ent Euro­pean re­cov­ery. With Rus­sia test­ing Europe’s re­solve to the east, the tim­ing of Europe’s gam­ble could not be worse.

The Greek gov­ern­ment is right to have drawn the line. It has a re­spon­si­bil­ity to its cit­i­zens. The real choice, af­ter all, lies not with Greece, but with Europe.

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