Дебатът за гръцкия дълг-Трета част: Първият пробив.Предстоят още!
Двадесет и четири часа след съобщението , че ЕЦБ спира кридитирането на гръцките банки, последва нов обрат: европейският трезор обяви, че разрешава на гръцката национална банка да използва 60 милиарда евро, за да окаже ликвидна подкрепа в сектора /близо 25 пъти повече от разрешението, което получи БНБ през лятото на 2014 г., за да спасява закъсали български банки/.
Прави се оказаха проф. Пол Кругман и Франсис Копола, които два дни преди това съзряха в първоначалното решение на ЕЦБ тактическа маневра и обявиха, че основанията за оптимизъм остават.
Така на втората седмица след своята изборна победа Сириза и правителството на Гърция направиха първия малък пробив в отбраната на остеритета, базирана в Берлин и Брюксел. Следват още! Вероятно ще ги научим с приближаването на сакралната дата 28 февруари, 2015 г., или непосредствено след нея.
Успехът на неуморната двойка държавници от ново поколение "Ципрас-Варуфакис" би трябвало да е сигнал и за политическите лидери в България и останалите страни от зависимата европейска периферия. Докога ще се оставят да бъдат третирани като втора и трета категория партньори в ЕС? Време е да консолидират своята позиция и да поискат цялостно преразглеждане на европейската финансова архитектура, построена върху гнилия остеритетен фундамент.
Гръцкият пример има общоевропейско значение. А вероятно и глобален ефект. От САЩ вече се чуват гласове за окончателен отказ от Машингтонския, несъстоял се, консенсус. Време е за сериозен дебат между всички държави, членове на европейкщата общност. Политическият дебат е сериозно улеснен от обмена на алтернативни мнения в международната общност на достоверните икономисти.
Платформата за отказ от остеритета и промяна на условията за обслужване на външния дълг, предложена от Сириза, стана повод за нова вълна от публикации по темата. Част от анализите на световно известни автори помествам тук- като трета част от поредицата, посветена на гръцкия дълг. В тях се намират част от отговорите на въпроси, които са в центъра на вниманието на достоверната икономическа мисъл още от началото на кризата:
- Какъв е смисълът след 6-годишно стриктно спазване на правилата на остеритета /за сурови бюджетни ограничения/ - без да се постигне напредък - тази безплодна стратегия, наложена от богатия европейски Север на по-бедния Юг , да е валидна и занапред?;
-Защо демократична Европа допуска един огромен частен дълг да се трансформира в публичен; и да се стоварва върху плещите на данъкоплатците-какъвто е случаят с Гърция други страни?
-Как чрез свиващо се потребление ще се постигне икономическо оживление? Повече от половин десетилетие подобно чудо не се случва!
-Може ли да се вмени морална вина и отговорност на цял един народ, при положение, че свръхзадлъжняването е натрупано от националния политико-олигархичен елит, при ясното съзнание за ставащото от страна на МФИ и европейските лидери?
-Каква е международната легитимност на конструкцията "Тройка" /ЕЦБ,МВФ, ЕК/, която в противоречие с конституциите на суверенни държави и европейската правна уредба ултимативно налага антикризисни политики? При това, без да носи пряка отговорност за провалите?
Становищата на проф. Дани Родрик, проф. Джоузеф Стиглиц, проф. Пол.Кругман, проф. Джеймс Гълбрейт и други по темата за гръцкия дълг, остеритета и икономическата криза в ЕС се съдържат в публикациите по-долу. Те са заимствани от специализирани издания и социални/професионални мрежи (виж и добавените статии в прикачените файлове).
Проф. Кръстьо Петков
Six key points about Greek debt and the forthcoming election
Tim Jones 23 January 2015
Syriza vs. The Troika: What’s Going on in Greece
by Benjamin Studebaker
Thank You Greece!
26/01/2015 by Maria Helena dos Santos André
Maria Helena dos Santos André (photo: www.ps-alemanha.de)
In a time when in Paris Marine Le Pen is “Ante Portas”, when xenophobic populists are marching through the streets of Dresden, when in London the UKIP sets the tone for an ever more anti-European hysteria, and when in Helsinki the Finnish government becomes the most ardent proponent of more austerity for Greece, for no other reason but the fear of a success of the “Real Finns” at the next ballot box, the Greek people have given a clear signal, voting against more austerity and for the European values of democracy, the welfare state, tolerance and inclusive societies.
They have rejected the ruling by European and international technocrats. They have said no to their national oligarchic establishment that has led the country into the current situation. But they also resisted the siren calls of Golden Dawn. They have given their confidence to an untested party, with no experience in government, a party that has presented an electoral programme proposing better governance, more democracy, greater social justice and an end of austerity policies that have destroyed the economy and created unprecedented hardship while the public (and private) debt continued to increase. The Greek voters have sent a clear message to the rest of Europe: they want to be part of Europe, they can’t bear more austerity; they need a sustainable solution to their debt problem; they want to be a respected partner in the European Union and play an active role in the common search for a Greek and European recovery.
Europe should not see the victory of Syriza as a threat. Instead, it should be seen as a clear signal from the people and as an opportunity for Europe as a whole to reconsider its crisis response.
Europe should not see the victory of Syriza as a threat. Instead, it should be seen as a clear signal from the people and as an opportunity for Europe as a whole to reconsider its crisis response, which has already lead the continent into what may become a decade of deflationary stagnation, even with the last intervention of the ECB. There is no easy solution to the deep crisis in Europe but one thing is certain: continuing with policies that do not work, because they concentrate exclusively on fiscal prudence, is the opposite of what must be done. We must give priority to growth, investment, employment and redistributive policies.
Anyone guided by realism will recognise that Greece cannot, at the same time, serve its tremendous debt burden and recover economically and socially. Insisting on servicing the debt without a strong economic recovery might be popular in some European capitals but it will just not work. Debts that cannot be paid remain un-payable even if creditors continue to insist that it should be paid.
The debt crises in Germany in the last century offer great lessons in this respect. After World War I, the victorious powers insisted that Germany should pay reparations independently of its economic performance. The results are well known: hyperinflation in the twenties, brutal austerity in the early thirties resulting in the rise of Hitler who immediately stopped servicing any foreign debt when he came to power.
After World War II, the Allies recognised that Germany had to become prosperous first and should pay afterwards. That reasoning lies behind one of the most generous debt restructuring agreements in history in 1953, when more than 50% of the German debt was written off, repayment was stretched out over more than half a century and debt payments were made conditional on the existence of a trade surplus. The last payment of debt from World War I was actually made as late as in 2010 and payments at no time exceeded 5% of German export earnings.
In many European countries the public debate on the debt crisis is also framed in moral terms. Many claim that Greece had cheated when entering the Eurozone, that they are free-riding on hard-working Northern Europeans, that they need to be taught a lesson in order to learn financial responsibility, etc. The judgements should not be about “Crime and Punishment” but about economic viability and a better future. If debt restructuring had been guided by any moral reasoning in 1953 it would have certainly been extremely difficult to make the case for German debt relief. But it was economically, politically and socially the right thing to do and it paid off not only for Germany but for Europe as a whole.
Greece’s 317 billion Euro debt today is in absolute terms 13 billion less than five years ago but due to the economic collapse the debt to GDP ratio nevertheless rose from 113% to 175% of GDP. Any assumption that this debt can be serviced without growth is illusionary. This must be recognised by all those interested in a solution and be the realistic starting point for renegotiating the debt.
As long as capitalism exists there has not been a boom that did not end in a crisis and not a crisis that wasn’t followed by a recovery. Policies should reduce the severity of the crisis and increase the speed of the recovery. Austerity has failed on both accounts but nevertheless it looks that, by a number of indicators, the crisis in Greece has finally bottomed out and, with the right policies of debt restructuring and of productive public investment, there is a reasonable chance for a strong recovery.
Bringing down unemployment and increasing revenues has to be a priority over debt repayment. The required economic growth will not come from any rapid rise in private sector investment as long as the risk of unsustainable debt and default remains. Therefore the solution to the Greek problem should start with a solution to the debt situation, a strong public investment programme leading to the creation of more and better jobs.
Researchers from the Levy Economics Institute in New York who, in cooperation with the Labour Institute of the General Confederation of Greek Workers, regularly publish a strategic analysis of the Greek economy have calculated the economic impact of a moderate public investment programme of 6.6 billion Euro per annum funded by the EU complimented by a debt moratorium until the country returns to the real GDP level of 2010. While this would certainly not solve Greece’s problems over night, it would set Greece on a much higher growth path than continuing the current policies (see the baseline scenario in the graph below).
Debt restructuring and public investment alone will not solve the Greek problem but there will be no solution without it. Improving the public administration, creating an efficient and fair tax system, fighting corruption, curtailing oligarchic power, rationalising pension systems, improving access to credit, improving the functioning of education, health and social protection systems and creating the conditions for job creation are some of the important elements in a comprehensive recovery strategy. However, some of these structural changes take time and have more long-term effects, while others can boost recovery more quickly. A government of new faces is better positioned to implement such a programme. These structural reforms have bigger chances of success if done in parallel with economic recovery, job creation and growth and not during a continued depression.
New faces have also a better chance to re-energize society and to put an end to vested interests that so far remain largely untouched. Strengthening institutions, including those that are responsible for social dialogue and collective bargaining, and improving the participation of citizens are essential for (re)-building trust in the state and political decision-making. The mistake of dismantling the industrial relations and collective bargaining system must be quickly and seriously addressed in order to achieve better labour market conditions, more quality and equality in employment and a fairer income distribution.
In the spirit of Franklin Roosevelt, the Greek people decided that “We have nothing to fear but fear itself” and put more trust into an alternative, sometimes expressing contradictory ideas, rather than to continue with the trotted path of failure.
The challenges Greece is facing are more extreme than in any other European country but they are not unique. Throughout southern Europe the policies of fiscal austerity, no public investment and wage repression have led to a deflationary stagnation with unacceptable levels of unemployment and an increase in inequalities. Pumping billions of Euros at close to zero interest rates into the private banking sector has failed to trigger private real investment and has not reached the real economy. It was more successful in raising asset prices than employment levels. As millions of people are unemployed and many governments can borrow at historically low interest rates, the case for large scale investment in public infrastructure and networks, in education, research and development at a European level is compelling.
European and international institutions have argued for six years that there is no alternative to austerity and that the Greek people will pay dearly if they abandon the policy prescription of the Troika. In the spirit of Franklin Roosevelt, the Greek people decided that “We have nothing to fear but fear itself” and put more trust into an alternative, sometimes expressing contradictory ideas, rather than to continue with the trotted path of failure. They have raised expectations and deserve the credit of the doubt and the support from those interested in a change of policies in Europe.
The Greek people must be thanked for putting the need for changing the course of economic policies firmly onto the European agenda. The stakes are high. A failure in Greece will be seen as vindication of austerity as the only option. It will have negative repercussions for any progressive alternative throughout Europe. Those convinced that Europe needs to change cannot sit on the fence, but need to engage in support of the new winds of reform.
This column was first published by the Global Labour Column
The Greek Hope
27/01/2015 by James K. Galbraith
Fifty-four years ago, in his inaugural address, President John F. Kennedy declared, “Let us never negotiate out of fear. But let us never fear to negotiate.” They were not the most soaring sentences in that short speech, but they were among the most important. For they signaled, deliberately and unmistakably to the Soviet Union, that the Cold War might be ended without turning hot, and that the world need not live forever under bluster, threat, and the shadow of nuclear war.
Today, Europe faces a negotiation over debt and depression. On one side there will be the young government of Greece. On the other, the financial powers of Europe and the world. Now as then, the question of fear cannot be escaped.
The European powers hold three cudgels as negotiations start. First, Greece has debts coming due this year that it cannot pay. Second, Greek banks rely on the Emergency Liquidity Assistance of the European Central Bank, which could be cut off. Third, Quantitative Easing gives the ECB a new way to insulate the rest of Europe from Greece’s agonies. Should Europe choose, these cudgels can be used to enforce a policy of threats, so as to maintain austerity, foreclosures and penury in Greece.
President John F. Kennedy declared, “Let us never negotiate out of fear. But let us never fear to negotiate.”
Threats are in the air. The Telegraphsummarized the EU finance ministers meeting on January 26: “The eurozone has ruled out debt forgiveness for Greece and warned its new anti-austerity coalition government must honour all past agreements…” The German government spokesman Mr. Steffen Seibert told the oligarchs at Davos that Greece must “take measures so that the economic recovery continues.” And that means “holding to its prior commitments and that the new government be tied in to the reform’s achievements.” Or as German Finance Minister Wolfgang Schäuble put it last December, “New elections change nothing”.
To Greeks these comments must be a cruel joke. What economic recovery? Whatachievements? If elections change nothing, why bother to hold them? And of course the premise is that “prior commitments must be honored” is just stubborn dogma. What SYRIZA’s victory drove home, above all, is the unanswerable point that failed policies must be changed.
UK Prime Minister David Cameron summarized the Greek view with British understatement: “What the Greek election will also show is that there are some warning signs in the global economy, including in the eurozone.” Well, yes. When policies fail, economies decline. Greeks are not alone in seeing the failure in front of their eyes.
The new Greek government under Alexis Tsipras will soon start negotiations with its European partners.
As the Telegraph reported, there are two issues: the agreements and the debt. On the first, Greece now proposes to recover command of its own fate. The experiment of troika control has been tried. The results are in. New policies to help the destitute and vulnerable, to stabilize the economy and to foster recovery, will be put in place. The past record of the Greek state is not good – this no one disputes. But the heavy-handed diktat that followed has been a disaster.
The issue behind the debt write-down is only in part an issue of resources. The alternative of “extend and pretend” is after all a form of fiscal transfer. The problem is that the practice piles debt on top of debt, and this is the lever that keeps the country under tutelage, always in the position of begging. A write-down is the means back to policy autonomy. The form and precise terms are, in part, what negotiation is about.
Talks under short deadlines, coercion and ultimatums would likely mean that Europe has taken the decision to prevent a real discussion and to blow up the talks at the start. If that is the decision, then the historical burden will be on those who took it, including for the chaos that may follow.
Greece must not be compelled to negotiate under fear. And Europe, for her part, must not fear to negotiate – calmly, without bluster or threats, in good faith.
What leverage does Greece have? Obviously, not much; the heavy weapons are on the other side. But there is something. Prime Minister Tsipras and his team can present the case of reason without threats of any kind. Then the right and moral gesture on the other side would be to throw the three cudgels out of the room, and in particular to grant fiscal space and to guarantee Greek financial stability while talks are underway.
If that happens, then proper negotiations can proceed. On this issue, Chancellor Merkel has made some of the mildest comments so far. Possibly she understands that the choices she makes – very soon – will determine Europe’s future.
In this situation, both halves of Kennedy’s dictum – drafted for him, by the way, by my father – apply. Greece must not be compelled to negotiate under fear. And Europe, for her part, must not fear to negotiate – calmly, without bluster or threats, in good faith.
Thinking About the New Greek Crisis
Paul Krugman - The New York Times
Markets are panicking. It’s important to understand that this is not a verdict on the new Greek government, or at any rate only the new Greek government; it’s a judgment that the risk of no agreement, and a disorderly breakdown of the whole process, is high.
I think it’s important to be as clear as we can about the stakes and the real interests here, lest players stumble into a disaster they could and should have avoided. So, some points about where things stand:
1. We are not talking about whether Greece will pay its debt. As I tried to explain the other day, the headline Greek debt number is more or less meaningless. The question is how much Greece will transfer to its creditors by running primary surpluses — and yes, at this point that’s the question, there’s no possibility that the creditors will transfer more resources to Greece.
2. If Greece were to adhere totally to the previous terms, over the next five years it would make resource transfers of about 20 percent of one year’s GDP. From the point of view of the creditors, that’s a trivial sum. From the point of the Greeks, however, it’s crucial; the difference between a primary surplus of 4.5 percent of GDP and, say, 1.5 percent of GDP for the Greek economy and the welfare of its citizens is huge. The only reason for the creditors to play hardball would be to make Greece an example, to discourage other debtors from trying to negotiate relief.
3. If the creditors do play hardball, their leverage does not come from the ability to refuse new loans to the Greek government. With Greece running a primary surplus, all new loans — and then some — are going to pay principal and interest on old loans, with less than nothing going to the Greeks. There was modest de facto aid to Greece in 2010-2012, but no aid is currently flowing, nor will it.
4. Instead, the power of the creditors over Greece comes via the ability to crash the Greek banking system, which is heavily dependent on the ability to borrow at need from the ECB. Cut off that support, and Greece suffers banking collapse. So yes, the creditors have a large club they can use on a recalcitrant Greece. But do they really want to do that? Within a European Union supposedly dedicated to democratic ideals? Actually, you have to wonder whether the ECB, which surely understands the stakes, would even be willing to go along. If the situation continues to look like unraveling, I would expect Draghi to say something to reassure the markets that a Greek bank cutoff is not on the table.
5. Ideals aside, the consequences of playing hardball with Greece over its banks could very easily be immense. Up until now, the euro has proved very durable, largely thanks to the point Barry Eichengreen emphasized: any country that even hinted at the possibility of leaving would face the mother of all bank runs. But as I worried some time ago, this argument becomes moot if the banking system has already collapsed. Grexit — the often speculated about, never so far materializing Greek exit from the euro — becomes a very real possibility if European creditors try to exert leverage by taking away the safety net for Greek banks.
6. And if Greece really does leave the euro — if it turns out that the single currency is not irreversible — do you really think there would be no contagion? Wanna bet on it?
7. In particular, think about what happens if Greece leaves the euro and then manages to find its footing — which it probably would after a chaotic year or two. The EU could prevent that by deliberately undermining the post-euro Greek economy. But that would be a betrayal of European principles.
8. At the moment, Germany is talking as if it intends to follow the Michael Corleone strategy. But do we really think that Syriza will or even can retreat with its tail between its legs immediately after winning a dramatic election victory? Again, wanna bet on it?
Daniel Davies tells us that “European policy makers aren’t stupid.” But they do say stupid things, still talking about expansionary austerity, still treating debt as a purely moral issue. Can and will they be realistic, accept that they can’t extract blood from a stone — at any rate not at the rate of 4.5 percent of GDP — in time to avert a spiral into disaster? . NYT Blogs (2015, 28.01)
Greek Elections, Democracy, Political Trilemma, and all that
08/01/2015 by Dani Rodrik
Two-and-a-half years ago I wrote a short piece titled “The End of the World as We Know It” which began like this:
Consider the following scenario. After a victory by the left-wing Syriza party, Greece’s new government announces that it wants to renegotiate the terms of its agreement with the International Monetary Fund and the European Union. German Chancellor Angela Merkel sticks to her guns and says that Greece must abide by the existing conditions.
Fearing that a financial collapse is imminent, Greek depositors rush for the exit. This time, the European Central Bank refuses to come to the rescue and Greek banks are starved of cash. The Greek government institutes capital controls and is ultimately forced to issue drachmas in order to supply domestic liquidity.
With Greece out of the eurozone, all eyes turn to Spain. Germany and others are at first adamant that they will do whatever it takes to prevent a similar bank run there. The Spanish government announces additional fiscal cuts and structural reforms. Bolstered by funds from the European Stability Mechanism, Spain remains financially afloat for several months.
But the Spanish economy continues to deteriorate and unemployment heads towards 30%. Violent protests against Prime Minister Mariano Rajoy’s austerity measures lead him to call for a referendum. His government fails to get the necessary support from voters and resigns, throwing the country into full-blown political chaos. Merkel cuts off further support for Spain, saying that hard-working German taxpayers have already done enough. A Spanish bank run, financial crash, and euro exit follow in short order.
As Greece goes to the polls on January 25th, we have come closer than ever to the second sentence of this dystopia becoming reality. The problem is not what Syriza demands: debt relief in the South, combined with demand expansion in the North, is necessary if the euro zone is to recover. The problem is the chain of events that could be unleashed if Germany and others mismanage the consequences of a Syriza victory.
In particular, Angela Merkel may well believe that the rest of the euro zone is now sufficiently insulated from the consequences of a Greek exit from the euro. And she may be right. But she may be wrong too. A Grexit would set a precedent, and markets may sense Spain’s future in the euro is no longer assured. Much will depend on the way the game will be played by all sides and on market psychology. Which means there is huge uncertainty about the outcome.
In view of the short-run problems, it seems foolhardy to contemplate the distant future. But I was asked to do just that for a volume on the future of European democracy, which led to this piece. I still believe that the political trilemma provides the right framework for thinking about these issues. So my discussion revolves around the implications of the trilemma for Europe.
The euro was something that had never been tried before: monetary union among democracies that retained political sovereignty. It is instructive to consider the narratives under which such a leap of faith could have made sense at the outset:
One theory, perhaps held most strongly by conservative economists, rejected the Keynesian perspective and re‐enshrined the “self‐equilibrating market” at the center stage of policy. In this worldview, the apparent malfunctions of markets – the boom and bust cycles in finance and macroeconomics, inequality, and low growth – were the product of too much government intervention to begin with. Do away with moral hazard in financial markets, institutionalized labor markets, counter‐cyclical fiscal policy, high taxes, and the welfare state, and all these problems would disappear.
This free market nirvana had little use for economic governance at any level – national or European. The single market and currency would force governments into their proper role – which is to do very little. The creation of transnational political institutions were a distraction at best, and harmful at worst.
A second theory was that Europe would eventually develop the quasi‐federal political institutions that would transnationalize its democracies. Yes, the single market and currency had created a significant imbalance between the reach of markets and the reach of political institutions. But this was a temporary phenomenon. In time, the institutional gaps would be filled in, and Europe would develop its own Europe‐wide political space. Not only banking and finance, but fiscal and social policy as well would become EU‐wide.
This image envisaged a significant amount of convergence in the social models that exist around the EU. Differences in tax regimes, labor‐market arrangements, and social insurance schemes would have to be narrowed. Otherwise, it would be difficult to fit them under a common political umbrella and finance them out of a largely common fiscal pot. The British, with their own sense of uniqueness, understood this well, which is why they always pushed for a narrow economic union and resisted anything that smacked of political union as well.
As I note in the piece, neither of the two theories could be articulated too openly. Doing so would have raised a torrent of criticism and objections. The minimalist economic model had little attraction beyond a narrow group of economists. And the federalist model would run up against widely divergent views even among the pro‐European elites about the political future of the Union.
That these opposing, but at least internally coherent, visions could not even be widely discussed in polite company should have told us something: neither in fact offered a practical solution to the euro zone’s institutional imbalance. Nevertheless, the absence of public discussion and debate meant that they would not be explicitly repudiated. So both justifications could linger on in the background, providing their adherents some comfort about the sustainability of the Union’s arrangements.
Alas, the euro zone’s problems ‐ deflation, unemployment, and economic stagnation on the economic side, and voter dissatisfaction and the rise of extremist parties on the political – no longer allow such equivocation.
This post was first published on Dani Rodrik’s Blog
Joseph E. Stiglitz
Joseph E. Stiglitz, a Nobel laureate in economics and University Professor at Columbia University, was Chairman of President Bill Clinton’s Council of Economic Advisers and served as Senior Vice President and Chief Economist of the World Bank. His most recent book, co-authored with Bruce Greenwald, …read more
FEB 3, 2015 29
A Greek Morality Tale
NEW YORK – When the euro crisis began a half-decade ago, Keynesian economists predicted that the austerity that was being imposed on Greece and the other crisis countries would fail. It would stifle growth and increase unemployment – and even fail to decrease the debt-to-GDP ratio. Others – in the European Commission, the European Central Bank, and a few universities – talked of expansionary contractions. But even the International Monetary Fund argued that contractions, such as cutbacks in government spending, were just that – contractionary.
We hardly needed another test. Austerity had failed repeatedly, from its early use under US President Herbert Hoover, which turned the stock-market crash into the Great Depression, to the IMF “programs” imposed on East Asia and Latin America in recent decades. And yet when Greece got into trouble, it was tried again.
Greece largely succeeded in following the dictate set by the “troika” (the European Commission the ECB, and the IMF): it converted a primary budget deficit into a primary surplus. But the contraction in government spending has been predictably devastating: 25% unemployment, a 22% fall in GDP since 2009, and a 35% increase in the debt-to-GDP ratio. And now, with the anti-austerity Syriza party’s overwhelming election victory, Greek voters have declared that they have had enough.
So, what is to be done? First, let us be clear: Greece could be blamed for its troubles if it were the only country where the troika’s medicine failed miserably. But Spain had a surplus and a low debt ratio before the crisis, and it, too, is in depression. What is needed is not structural reform within Greece and Spain so much as structural reform of the eurozone’s design and a fundamental rethinking of the policy frameworks that have resulted in the monetary union’s spectacularly bad performance.
Greece has also once again reminded us of how badly the world needs a debt-restructuring framework. Excessive debt caused not only the 2008 crisis, but also the East Asia crisis in the 1990s and the Latin American crisis in the 1980s. It continues to cause untold suffering in the US, where millions of homeowners have lost their homes, and is now threatening millions more in Poland and elsewhere who took out loans in Swiss francs.
Given the amount of distress brought about by excessive debt, one might well ask why individuals and countries have repeatedly put themselves into this situation. After all, such debts are contracts – that is, voluntary agreements – so creditors are just as responsible for them as debtors. In fact, creditors arguably are more responsible: typically, they are sophisticated financial institutions, whereas borrowers frequently are far less attuned to market vicissitudes and the risks associated with different contractual arrangements. Indeed, we know that US banks actually preyed on their borrowers, taking advantage of their lack of financial sophistication.
Every (advanced) country has realized that making capitalism work requires giving individuals a fresh start. The debtors’ prisons of the nineteenth century were a failure – inhumane and not exactly helping to ensure repayment. What did help was to provide better incentives for good lending, by making creditors more responsible for the consequences of their decisions.
At the international level, we have not yet created an orderly process for giving countries a fresh start. Since even before the 2008 crisis, the United Nations, with the support of almost all of the developing and emerging countries, has been seeking to create such a framework. But the US has been adamantly opposed; perhaps it wants to reinstitute debtor prisons for over indebted countries’ officials (if so, space may be opening up at Guantánamo Bay).
The idea of bringing back debtors’ prisons may seem far-fetched, but it resonates with current talk of moral hazard and accountability. There is a fear that if Greece is allowed to restructure its debt, it will simply get itself into trouble again, as will others.
This is sheer nonsense. Does anyone in their right mind think that any country would willingly put itself through what Greece has gone through, just to get a free ride from its creditors? If there is a moral hazard, it is on the part of the lenders – especially in the private sector – who have been bailed out repeatedly. If Europe has allowed these debts to move from the private sector to the public sector – a well-established pattern over the past half-century – it is Europe, not Greece, that should bear the consequences. Indeed, Greece’s current plight, including the massive run-up in the debt ratio, is largely the fault of the misguided troika programs foisted on it.
So it is not debt restructuring, but its absence, that is “immoral.” There is nothing particularly special about the dilemmas that Greece faces today; many countries have been in the same position. What makes Greece’s problems more difficult to address is the structure of the eurozone: monetary union implies that member states cannot devalue their way out of trouble, yet the modicum of European solidarity that must accompany this loss of policy flexibility simply is not there.
Seventy years ago, at the end of World II, the Allies recognized that Germany must be given a fresh start. They understood that Hitler’s rise had much to do with the unemployment (not the inflation) that resulted from imposing more debt on Germany at the end of World War I. The Allies did not take into account the foolishness with which the debts had been accumulated or talk about the costs that Germany had imposed on others. Instead, they not only forgave the debts; they actually provided aid, and the Allied troops stationed in Germany provided a further fiscal stimulus.
When companies go bankrupt, a debt-equity swap is a fair and efficient solution. The analogous approach for Greece is to convert its current bonds into GDP-linked bonds. If Greece does well, its creditors will receive more of their money; if it does not, they will get less. Both sides would then have a powerful incentive to pursue pro-growth policies.
Seldom do democratic elections give as clear a message as that in Greece. If Europe says no to Greek voters’ demand for a change of course, it is saying that democracy is of no importance, at least when it comes to economics. Why not just shut down democracy, as Newfoundland effectively did when it entered into receivership before World War II?
One hopes that those who understand the economics of debt and austerity, and who believe in democracy and humane values, will prevail. Whether they will remains to be seen.