Be Bold, Frau Merkel
The Greek people have spoken. Now it’s time for Germany and other creditors to summon some political courage, and extend the debt-relief they desperately need.
The Greek people have spoken, delivering a defiant oxi (no) to their creditors’ terms. Blackmailed with the threat of being forced out of the eurozone and under siege in an economy starved of cash by the political European Central Bank, Greeks resoundingly rejected — by 61.3 percent to 38.7 percent — the prospect of being a permanently depressed colony bled dry by their incompetent creditors. Now what?
Most spreadsheet shifters and politicians on the creditor side want to persist with the logic of confrontation. To quote Oscar Wilde, they know “the price of everything and the value of nothing.” But even in narrow accounting terms, their strategy is flawed: Contrary to their expectations, Greeks have not surrendered, and pushing them out of the eurozone would be more costly to the creditors than clinching a deal. Besides, the stakes are much bigger than that. Does the eurozone really want to be an empire that tramples on democracy and crushes dissent? Is fear enough to hold it together, or might disintegration have a domino effect? What about the cost of neglecting all the other big issues that Europe’s leaders ought to be addressing? For everyone’s sake, it is time to break free of the narrow, destructive logic of creditor nationalism and draw a line under the Greek crisis.
The creditors pretend their small-mindedness is a point of principle: Everyone has to obey eurozone rules, and these stipulate that governments must pay their debts. Except they don’t stipulate that. Nowhere in the Maastricht Treaty that created the euro does it state that governments have to pay their debts in full. How could it? Sometimes they can’t. But instead of creating a mechanism for restructuring the debts of an insolvent sovereign, the treaty drafters left a blank in the hope that such a situation would never arise. They did stipulate, though, that governments should not bail out their peers.
When Greece became insolvent in 2010, its debts ought to have been restructured, as independent analysts and International Monetary Fund experts advised. Instead, eurozone governments made a catastrophic policy choice. Insisting that debts were sacrosanct and the stability of the entire eurozone was at stake, they decided to breach the no-bailout rule and lend European taxpayers’ money to Greece. As Karl Otto Pöhl, the former president of the Bundesbank, put it: “It was about protecting German banks, but especially the French banks, from debt write-offs.… Now we have this mess.”
Critics contend that this is ancient history, but it isn’t. That tragic decision and subsequent mistakes have transformed the political economy of the eurozone. Initially a voluntary union of equal member states, it has become a hierarchical relationship in which eurozone institutions have become instruments for creditors to impose their will on debtors. The bailout of Greece’s private creditors has also set Europeans against each other: Germans, Spaniards, Slovaks, and others now have an interest in resisting the debt relief that Greece needs to recover. To find an amicable solution to the Greek crisis, the eurozone needs to escape from this destructive logic.
Emmanuel Macron, the current wunderkind of French politics, is one of the few front-line politicians perceptive and brave enough to say this publicly. “Let’s not re-enact the Treaty of Versailles,” France’s economy minister said the day of the Greek vote. The imposition of iniquitous terms on a defeated Germany after World War I bled the country dry. Germany’s war reparations were repeatedly written down, but not before Adolf Hitler took power and repudiated them. After World War II, the country’s international creditors, led by the United States and including a liberated Greece, had the wisdom and magnanimity to halve post-Nazi (West) Germany’s debts in 1953, laying the foundations for its postwar economic “miracle.” The United States also provided Marshall Plan aid to rekindle investment and growth.
That breadth of vision — enlightened, long-term self-interest — is what is needed now. It also requires leadership, a quality in short supply these days, and political capital, of which Germany’s chancellor, Angela Merkel, has plenty.
The starting point is to be honest with voters. Merkel and others need to explain that Greece cannot pay its debts in full. So the choice is not whether Greece’s debts are written down, but how. They could be restructured in an orderly fashion in which creditors get some of their money back. Or they will be defaulted on in a chaotic fashion in which some creditors may get nothing back. If that forced Greece out of the eurozone, the country would also default on its Target2 liabilities to the European Central Bank (ECB). The total bill: 350 billion euros or more.
The IMF’s belated admission last week that Greece’s debts are unsustainable — albeit without conceding that the IMF’s previous assessment in 2012 was disingenuous — could make this easier. Berlin could simply accept the IMF’s conclusions as those of an expert authority. Once the principle of debt relief is accepted, as the French government has already suggested, proceeding in an orderly fashion imposes itself.
The second point is to highlight the broader costs of Grexit to Europe. Those who think Greece’s departure would strengthen the eurozone are deluded. There is no political appetite for strengthening its institutional framework; even the supposedly farsighted report by its “five presidents” set its sights low. And even if eurozone leaders were committed to such changes, the peoples of Europe are not. Only small steps can be achieved without changing the EU treaty — and big steps requiring treaty change would doubtless be rejected in France and the Netherlands, as in 2005, and indeed elsewhere too.
On the contrary, a Grexit would have incalculable costs. EU integration’s great strength is its sense of permanence and inevitability. It began as a transformative project, and to stand aside was to risk isolation against the march of history. Yet Europe is now fragmenting, and the departure of even small, rebellious Greece would not just be a dismal failure; it could also trigger further unraveling.
Although the immediate financial fallout would doubtless eventually be contained by ECB intervention, a demonstration that monetary union is not irrevocable would make it permanently more fragile. That would have an enduring economic price: an additional risk premium on investing in the continent’s vulnerable economies, thereby entrenching their position on the eurozone’s “periphery” — the opposite of the economic convergence that the monetary union is meant to stimulate.
Perhaps more significant would be the political contagion. The brutal ejection of Greece would solidify the disenchantment with Europe felt by many on the left and buttress the anti-euro right too. It would also bolster their conviction that exit is possible. If Greece did better than expected outside the euro — which wouldn’t be difficult, given the belief that it would end up a failed state — it could have a domino effect. There is also geopolitics. Greece is situated between an unstable Balkans and an aggressive Russia, and it is an entry point for unwanted migrants and potentially Islamic State terrorists too, as American policymakers keep reminding Berlin.
The third point is that the eurozone needs to proceed with the consent of all its members — including Greece. As Macron said, “It would be a historic mistake to crush the Greek people.” When Greek Prime Minister Alexis Tsipras says that the eurozone must respect (Greek) democracy, his eurozone counterparts respond that Greece must also respect their democracies. That debt relief would impose losses on European taxpayers is deeply regrettable and unfair. But their democratic wishes were violated by their own leaders, and those losses imposed, back in 2010. Those losses are sunk: Debt relief merely makes this transparent to voters — hence why Merkel is so desperate to avoid it.
One solution, therefore, is to use opacity as cover for compromise: maintaining the pretense that Greece will pay its debts to eurozone governments in full while extending the maturities of the loans and trimming their interest rates. Pushed to its logical conclusion, a zero-coupon perpetuity — a bond that pays no interest and is never redeemed — would write off all Greece’s debt! But that would still leave the debts to the IMF and the bonds illegally purchased by the ECB as part of its Securities Markets Programme, which have higher interest rates and come due over the next few years. So some kind of debt swap, as proposed by the Greek government, is needed.
The final issue is what conditions the creditors should demand for debt relief. The official line is that relief is unthinkable unless Greece commits to “reform,” as defined by the creditors: mostly tax hikes and spending cuts, rather than genuine growth-enhancing measures. The creditors’ priority has been getting their money back or at least being seen to act tough, rather than boosting Greece’s long-term prospects. But that isn’t just undemocratic; it’s damaging for Greece. If Athens needs outside advice, it would be better served by more disinterested experts such as the Organisation for Economic Co-operation and Development and the World Bank.
The permanent combat — sorry, negotiations and monitoring — between Greece and its creditors is politically draining. It’s in everyone’s interests to draw a line under the crisis. The creditors should propose debt relief sufficient for Greece to regain market access, provide no further funding, and demand no new conditions. Greeks could thus regain control over their destiny and hold the Syriza government accountable for its decisions at the next election. European leaders would have more time to devote to other pressing matters, not least how to address the economic stagnation and political disenchantment in their own countries, as well as issues such as Ukraine, the Middle East, and migration.
Overcoming the logic of confrontation is a tall order. Positions are entrenched and tempers frayed. Tsipras has already offered an olive branch by forcing the resignation of his controversial finance minister, Yanis Varoufakis, whom the creditors detested. Now it’s up to the creditors. Be bold, Frau Merkel: Put an end to the trench warfare and start building the peace.
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