The Political Tragedy of the Greek Economic Crisis
With unemployment worse than during the Great Depression, we should thank the gods things aren’t worse. But it is humans (read: politicians) who have put Athens on the brink of disaster.
In the Athens of 450 B.C.E., Euripides, Aeschylus, and Sophocles wrote plays in which the devastating outcomes were the consequence of the very character of its protagonists. Today, Greece is living a similar tragedy, because the people have inflicted it on themselves. The drama may seem endless — a succession of similar and recurrent meetings and market jitters — but the noose is tightening on the Greek government: It managed to make Tuesday’s $840 million debt payment only by forcing hospitals, universities, and local governments to deposit their cash with the central bank. The government may not have the money to pay salaries and pensions this month; meanwhile, another $1.2 billion debt comes due next month.
Greek Prime Minister Alexis Tsipras is hinting that the kind of austerity creditors demand would require a referendum. German Finance Minister Wolfgang Schäuble encourages that approach, since it would force Greeks to make an up-or-down choice about whether they are willing to make the changes necessary to remain in the Eurozone.
The Greek people don’t want to ditch the euro, but they also don’t want to continue the painful austerity that is necessary for Greece to remain part of the currency union. The narrative is taking hold that Greeks are uniquely irresponsible: tax cheats and budget cookers who deserve their suffering. The recklessness of Finance Minister Yanis Varoufakis seems to personify the critique. But what is surprising about the Greek default drama is actually not that their politics have turned populist, but that the society has held up so well in the extreme circumstances it has endured the past five years: GDP has contracted by more than 25 percent since 2010 and unemployment is higher than in the United States during the Great Depression.
The economics for Greece are daunting. The government is indebted to the tune of $376 billion. That’s nearly twice the country’s gross domestic product. They’ve already been bailed out twice by the European Union; preventing a market rout required the head of the European Central Bank (ECB) to commit the EU to do “anything necessary” to preserve the currency. In the longer term, the Greek government will almost surely require a fresh infusion of up to $50 billion. And Greece owes another $1.5 billion in June. Athens is hoping that the ECB will hand over the profits made from the Greek debt it holds — in essence, asking bond holders to have taken risk for no gain. That the ECB is even considering this option demonstrates how much Europeans want to keep the currency union intact.
The problem is that no one wants to trade with Athens. The Greek government was only able to lure $2.2 million in securities purchases this month. The European Central Bank will no longer accept Greek government bonds as collateral in lending. Neither the International Monetary Fund (IMF) nor the EU will unlock further assistance without the Greek government committing to reforms it was elected to repudiate. Absent a policy reversal that creditors have adamantly ruled out, Greece will be in default.
Default is looming less for economic than political reasons. Greece’s government was elected making promises on which it cannot deliver, and Tsipras seems to lack the political skill to bring along the public for what is necessary. As economist Thomas Sowell wrote of the sub-prime housing crisis in the United States, it’s not economics that created the problem, but politics. Money has been rushing out of Greece because of political uncertainty about whether the government can pay its debts and whether it will find accommodation with its creditors. But it’s not about economic fundamentals at this point. It’s the antics of the Syriza politicians that have so aggravated its creditors (who are now almost exclusively the IMF, the ECB, and other European governments) and market makers (analysts and potential investors).
Syriza mistakenly believed it could extort better terms from other European governments by loudly proclaiming itself to be tribunes of the people. But other EU governments got elected, too, and they are likewise accountable to voters who are unmoved by Greece’s problems. Syriza also wrongly thought it could foster debtor country solidarity — an uprising by Italy, Spain, Portugal, Cyprus (and maybe even France) against Teutonic austerity. That failed miserably: there might not be warm, fuzzy feelings toward Berlin these days, but many Europeans have endured stringent austerity measures since the 2008 financial crisis and believe Greeks have been living beyond their means. The governments of those countries, and the German keystone of the EU, are in no mood to be lectured to by Syriza’s left-wing academics who’ve never had to put together a budget.
Greece had a primary surplus when Syriza took office — that is, tax receipts were sufficient to operate the government if debt were excused; now even outright default wouldn’t make Greece solvent. The government would still need to borrow money to pay salaries and pensions. And if Athens defaults, who would lend it the money to get back on its feet? Either Greece will be bailed out again by the EU or it will have to return to markets for financing — at even more prohibitive rates. Default would also further constrict revenues due to general economic disruption and reduced tax payments. So even if the Greek government defaults in the next few months, Greece’s troubles won’t end.
The tragedy of all this is that Greece had been through the worst of its austerity and realignment. Economic growth was turning up at the end of 2014. Bond issuances were selling at manageable long-term interest rates. And the European Central Bank had effectively deterred markets’ predatory instinct to pick apart a common currency with uncommon risk ratios. If only Greeks had been a little more patient; if only their establishment politicians had a little more credibility with the public to argue that the worst was over. Perhaps then Syriza wouldn’t have been elected and the Greek tragedy we are likely to see play out would have been averted.
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