You don't have to be a radical leftist to get that Athens needs debt relief. And a Syriza victory in this month's elections might be the only way to get it.
- By Philippe LegrainPhilippe Legrain, who was economic advisor to the president of the European Commission from 2011 to 2014, is a visiting senior fellow at the London School of Economics’ European Institute and the author of European Spring: Why Our Economies and Politics Are in a Mess — and How to Put Them Right.
European politics normally pauses for the Christmas break. But this time it erupted with a vengeance. On Dec. 29, Greek parliamentarians rejected the government’s candidate for president, triggering early elections scheduled for Jan. 25. Syriza, a radical-left coalition that wants to renegotiate the terms of Greece’s 205 billion euros’ worth of loans from eurozone governments, is leading in the polls.
Many fear that a showdown between eurozone authorities and a Syriza-led government bent on debt relief and ending austerity could revive the panic that almost destroyed the euro in 2012 and could even force Greece out of the 19-country currency union. The Athens stock exchange has plunged. Yields on Greek government bonds have soared. The cost of insuring against a Greek default has skyrocketed. But a Syriza victory on Jan. 25 may not be a calamity for Europe in the end. It may be a necessary step toward resolving a crisis that has been festering since 2009.
It’s not surprising that voters are angry with Prime Minister Antonis Samaras’s coalition government, which has implemented the brutal austerity demanded by the European Union and the IMF since Athens received its first bailout in 2010. Greeks have suffered six years of severe slump. The economy has shrunk by more than a quarter. Incomes have collapsed by nearly a third; many workers go unpaid. One in four Greeks — and one in two young people — is unemployed. The social safety net has been shredded. Many families scrape by on seniors’ slashed pensions. Crowds jostle for handouts at food banks. Some children are reduced to scavenging through rubbish bins for scraps. Hospitals run short of medicines. Malaria has even made a return.
Eurozone policymakers insist that Greeks have only themselves to blame for their plight and that the harsh treatment the policymakers imposed is working. But that isn’t true. Yes, successive Greek governments splurged before the crisis, doling out jobs and favors to their political patronage networks. With tax evasion rife, they borrowed abundantly: a whopping 15 percent of GDP in 2009 alone.
But Greece’s reckless borrowing was financed by equally reckless lenders. First in line were French and German banks that lent too much, too cheaply — foolishly treating the Greek government as if it were as creditworthy as Berlin and encouraged by Basel capital-adequacy rules and European Central Bank collateral-lending rules that treated sovereign bonds as risk-free.
By the time Greece was cut off from the markets in 2010, its soaring public debt of 130 percent of GDP was obviously unpayable in full. It should have been written down, as the IMF later acknowledged publicly. Austerity would then have been less extreme and the recession shorter and shallower. But to avoid losses for German and French banks, eurozone policymakers, led by German Chancellor Angela Merkel, pretended that Greece was merely going through temporary funding difficulties. Breaching the EU treaties’ “no-bailout” rule, which bans eurozone governments from bailing out their peers, they lent European taxpayers’ money to the insolvent Greek government, ostensibly out of solidarity, but actually to bail out creditors. Poor Greeks were, in effect, consigned to a debtor’s prison.
While foreign banks that held on to their Greek bonds eventually took some losses in 2012, Greece’s EU creditors have bled the country dry. Thus eurozone banks share responsibility for Greece’s plight, while eurozone policymakers — as well as the Greek elites who did their bidding — are to blame for the extent of the misery that Greeks have endured. So whatever you think of Syriza’s left-wing politics, it is justified in demanding debt relief from the EU. It’s a pity more mainstream Greek voices aren’t doing so too.
Debt relief isn’t just a matter of justice. It’s an economic necessity. Contrary to the propaganda from the EU and Samaras’s government, Greece is not putting the crisis behind it. Yes, the economy is finally growing a little: by 1.9 percent in the year to the third quarter of 2014. Employment has edged up. The government has achieved a primary surplus — its revenues now cover its outgoings, excluding interest payments. And it managed to sell investors some longer-term bonds last year. Briefly, Samaras even thought that Greece could escape the EU’s clutches and fund itself freely from the markets when its EU loan ends in February.
Yet even at the height of the markets’ euphoria about the eurozone last summer, before Germany’s economy stalled, investors who were desperate for yield and increasingly blind to risk in markets awash with central-bank liquidity were unwilling to lend to the Greek government on terms on which it could finance itself sustainably. And the mood soured long before a Syriza government seemed imminent.
Greece’s public debt is still a crushing 175 percent of GDP. With the economy gripped by deflation — prices fell by 1.2 percent in the 12 months to November 2014 — the real debt burden is rising. Even under optimistic scenarios for growth and interest rates, bringing it down would require implausibly large payments to hated foreign creditors for the foreseeable future.
Without debt relief, the economy looks set to remain depressed. While it has scope for a bounce from its depths, a sustained recovery strong enough to make up lost ground, put Greeks back to work, and bring down debt is not in the cards. Even at its current annual growth rate, the economy would recover to its 2008 level only in 2030. Domestic demand is depressed by the debt overhang, while exports remain weak. Even with imports suppressed by crunched incomes, the country is running a whopping (and widening) trade deficit. The banking system is bust. No wonder businesses aren’t investing.
Nor has Greece fixed its fundamental flaws. Despite all the talk of reform, the EU’s priority has been austerity and wage cuts. The corrupt, clientelist political system remains intact. Politically connected businesses continue to have a stranglehold over cartelized markets. The rich still don’t pay their taxes. Re-electing Samaras and his New Democracy party won’t change any of that.
Nobody knows how an untested Syriza would behave in government. While its roots are on the hard left, Alexis Tsipras, its telegenic 40-year-old leader, has been softening his rhetoric and policy stance. Yes, Syriza’s spending commitments, such as hiking pensions, seem unrealistic. Regrettably, the left-wing coalition wants to tax and regulate cosseted capitalists instead of exposing them to competition to up their game. But since Tsipras’s movement does not have a stake in the clientelist system, it might actually follow through with its reform pledges. And on the key issue of debt relief, Syriza is Greece’s best hope.
If Merkel were wise, she would make a virtue of a necessity and offer Greece debt relief as a gesture of solidarity. She must know that if the euro ultimately collapses, Germany will be blamed — again — for wrecking Europe. The chancellor could call on historical precedent: West Germany’s debts were slashed in 1953 through the London Agreement. She could even throw in a Marshall (or Merkel) Plan of investment for Greece and other crisis-hit countries that would also boost German exports.
Unfortunately, that is highly unlikely. Because of Merkel’s mistaken bailout of Greece’s private creditors in 2010, German taxpayers would lose out if Greece’s debt were cut. Since Germans self-servingly believe that as creditors they are virtuous, they feel no obligation to be generous to Greeks whom they view as sinful profligates. And Berlin is loath to set a precedent that could encourage others, notably the Irish, to seek relief for the bank debt unjustly imposed on them by the EU.
So Greece needs to stand up for itself and demand a negotiated write-down, backed by the threat of unilateral default. It can credibly do so: Since Athens has a substantial primary surplus, it would not need to borrow if it stopped servicing its debts. Syriza says it won’t write down bonds held by private investors, so Argentina-style legal entanglements aren’t a concern. With the bonds held by Greek banks untouched, the European Central Bank could scarcely refuse to accept them as collateral for liquidity. Meanwhile, German threats to force Greece out of the euro are probably bluster: Merkel has no legal right to deprive Greeks of the use their own currency, and it is implausible that unelected central bankers would dare splinter the eurozone. So Tsipras just needs to control his spending urges and stand his ground.
Will this cause upheaval? No doubt. Could it go horribly wrong? Of course. Is it necessary? Absolutely. Choosing the “safe” Samaras option would condemn Greece to continuing misery.
Photo by SAKIS MITROLIDIS/AFP/Getty Images