WHY EUROZONE MUST BACK DOWN,
Debt that can’t be paid, won’t. Deal with it.
Greek voters have overwhelmingly rejected the conditions Europe had imposed on them. Rightly so. As I wrote before the referendum, “I can think of no depression, ever, that has been so deliberate and had such catastrophic consequences.” Those conditions had led to a 25% decline in gross domestic product and a 28% unemployment rate.
I don’t believe that Europe’s leaders were seeking to punish Greece. They were just using bad models — evidenced by the gap between what they thought would happen and what did. Europe and the International Monetary Fund predicted a fairly quick turnaround. The reality was deepening recession.
GREECE TRIED REFORM
And it wasn’t because Greece didn’t do what it was supposed to. Greece had the biggest and fastest fiscal consolidation among the advanced European economies after the global financial crisis, ruthlessly cutting back expenditures and raising new revenues.
Greece did not do all of the demanded structural reforms. Some it should have, such as doing a better job of collecting taxes from the rich. Others might make sense when the economy is on the road to recovery — but not in the middle of a great depression.
If Greece had done all that was asked, the situation today would be little different in terms of gross domestic product. But more people would be unemployed and suffering. It is not these “structural impediments” that are holding Greece back. Before any reforms, Greece grew at a faster rate than the European Union from the mid-1990s until the global crisis.
The question for European leaders now is, will they stick with a disastrous policy? Or will they combine a desire to preserve the euro with good economic policies and a respect for democracy? Can they reform the reform package sufficiently?
This is the moment to stand against unthinking austerity. Four years ago, as the first signs of failure emerged, Europe’s leaders recognized that what was needed was a growth strategy, but they delivered more of the same.
Too little of Greece’s debt was restructured. When the crisis began, Greece’s debt was about 117% of GDP. Today, after a program allegedly designed to increase the sustainability of debt, it stands at 177%.
Though the conditions Europe imposed on Greece caused its depression, Greece saw little of this money — about 90% went to the creditors, including German and French banks.
BANKS BAILED OUT
This is typical: Most bailouts are not bailouts of the country but of the Western banks who made the bad loans. It might be nice that the European governments bailed out their banks, but the Greeks rightly ask why it should be done so much on their backs.
Now, even the International Monetary Fund is calling for deep debt restructuring. There are many ways this can be done: lengthening the time over which loans are paid back; lowering interest rates; writing off some debt or converting debt into GDP-linked bonds, which would pay more if Greece recovered. This would align the interests of Greece and its creditors in getting a quick return to growth.
Supposedly, the IMF report detailing this was suppressed by European leaders who didn’t want a full discussion of what would work. Some wanted to get rid of the new Greek government elected to end austerity.
An agreement that would keep Greece in the eurozone is clearly possible: Deep debt restructuring (recognizing that money that can’t be repaid won’t be); more modest budget goals and reasonable structural reforms focused on the central issues facing Greece are key. To stick with current demands is a sure recipe for continued depression and growing social and political chaos.
And the European Central Bank must provide liquidity now. What does it mean to be a currency union if the ECB doesn’t act as lender of last resort? Not to provide the euros banks need to pay depositors would be tantamount to pushing Greece out of the eurozone. If Greece’s partners continue in the same direction, I am afraid the game is over. It will be bad for Greece, bad for Europe and bad for the world economy, including the United States.
Even if the euro survives for the moment, it is the beginning of the end. At the next crisis — and there will be more — some other country will be forced out. With Greece’s departure, the eurozone will begin to fray.
Even those of us who think the euro was a mistake don’t want to see this tragic end.