when you have an economy that is in a free fall there has to be a growth strategy and not simply an effort to squeeze more and more out of population that is hurting worse and worse.
These are the words of the US president Barack Obama in response to a question about the new developments in Greece. Indeed, the Eurozone’s economic strategy of the last fiver years has obviously failed: it is now arguably the most disappointing economic performer in the world. In that light, it is the duty of those who care about Europe and about the Greek people to stand in solidarity with real and honest attempts to re-calibrate European economic policy.
Before the 2008 financial crisis, Greece was already a fragile and regionally uncompetitive economy, trapped in single currency which it could not control. To that poor context Greece added years of deficits and accumulating debt. In 2008 it ran a deficit of 10% of GDP and by 2009 that value was 16% of GDP. The debt to GDP ratio was higher than 100% even before the crisis.
After the financial crisis Greece was locked out of financial markets by lender’s unwillingness to lend. In 2010 it received money from the EU, ECB and IMF that it used to pay its private creditors. However, none of Greece’s internal competitiveness problems was solved or even addressed – this is the responsibility of all parts who played a role in the process. What happened was that debt rose (instead of declining), GDP tanked (instead of increasing) and unemployment skyrocketed (instead of of declining). Unsurprisingly this solved nothing.
Between the first announcement of a “bail out program” and now, there has already been a degree of debt default. It affected mostly private creditors. But since the logic of “squeezing more and more” money without changing the system is maintained, nothing is solved again. The happy march into the abyss has continued until late 2014 with money coming into the country, and going out into debt holders after the Greek people add some blood, sweat and tears to it.
What’s happening now
It’s hardly surprising, and in fact quite rational, that people wanted to try something different. After years of rising unemployment, decline in living standards, loss of hope, and no signs of any improvement (in fact quite the opposite) the Greeks voted out the establishment parties that collaborated into getting them in the tragic state they are in. One of the ugly outcomes of this, is a rise of Nazi parties in Greece. However a potentially fruitful outcome is the rise to power of a coalition, not tied to the old interests and establishment, which openly says what the vast majority of economists agree on for years: the Greek debt burden and payment plan is unsustainable. After the January 2015 Greek election, US president Obama said about austerity policies in Europe:
you cannot keep on squeezing countries that are in the midst of depression. At some point there has to be a growth strategy in order for them to pay off their debts and eliminate their deficits. […] when you have an economy that is in a free fall there has to be a growth strategy and not simply an effort to squeeze more and more out of population that is hurting worse and worse.
This is what Yanis Varoufaks, the new finance minister of Greece has said he wants: to break the logic of pouring money into a black whole of debt repayments with a moribund economy. His detailed plans are, at the moment, still unknown but he declared the intention of making no unilateral moves. He did declare the wish to have time to come up with a credible plan (a “frenzy of reasonableness” he called it) , and to negotiate with European partners a different strategy for Europe. This why the establishment feels threatened by the Greek newcomers: because they challenge the dominant system, and wish to make some changes (which it obviously needs). The request for time for the new government some time to draft proposals, has already been shunned by the Eurogroup (whose president strikes me as a charming fellow), and the ECB. That’s a bad start.
We should support Greece’s request to sit and negotiate, and we should support Varoufakis’ stated intentions. For two reasons: (1) Because the European strategy of of neglecting growth has obviously failed: the Eurozone is now arguably the most disappointing economic performer in the world. Fiscal discipline is required, as is keeping debt under control. At the same time so is growth and investment in the future. (2) Because we should have solidarity with our European partners, and long term vision. After World War I, the absurd reparations demanded of Germany, plus the crisis of the 1930s created the climate for the rise of National-Socialism. However after World War II, Germany’s external debts were forgiven by the allies. Certainly not because Germany was without sin or did not deserve to pay reparations, but because the priority was a longer term vision for a peaceful and prosperous Europe. (It worked).