Striking state doctors
and health workers protest against cuts in central Athens. Photograph:
Aristidis Vafeiadakis/ZUMA Press/Corbis
Greece has become a major issue in the German elections, as
politicians debate the effectiveness of EU intervention, including the
likely waste of German taxpayers' money. Wolfgang Schäuble, the powerful
minister of finance, has openly stated that there will have to be another package for Greece,
although the sums are likely to be small. The IMF, meanwhile, has been
pushing the EU to accept a restructuring of Greek debt. The debate has
also been echoed in Greece, with government sources hinting at some
lessening of the burden of debt after the German election, the banking
lobby arguing against debt restructuring and the opposition decrying the
intervention altogether.
There is no doubt that the Greek programme has failed. In 2010 Greek public debt was just over €300bn, mostly privately held, two thirds of it by lenders abroad and governed by Greek law. The rational option would have been for Greece to declare default, seek a rapid restructuring of its debt and place its economy on a new footing. This would probably have meant exiting the European Monetary Union, a move with considerable costs but also major advantages in allowing the Greek economy to make a fresh start.
Instead, the EU, led by Germany, decided to "rescue" Greece by offering it massive fresh borrowing, while forcing it to submit to severe austerity and wage cuts. The results have been catastrophic: cumulative economic contraction approaching 25%, adult unemployment at nearly 30%, youth unemployment close to 65%, unprecedented poverty, destruction of the welfare state and humanitarian crisis in the urban centres. Greek debt, meanwhile, is currently higher than in 2010, standing at €321bn and, since the economy has collapsed, its ratio to GDP approaches an exorbitant 180%. This is the background to the current debate.
The "rescue" programme has already included a restructuring of Greek debt. Some of it was written off, although most of the losses actually fell on Greek lenders – banks, pension funds and small savers. Its maturity has been lengthened substantially and interest rates have come down dramatically to just over 2%.
The problem is that in 2014-15 Greece must still make debt payments of more than €40bn and, since the rescue programme is ending in 2014, it is not clear where these funds will come from. The government has cut spending dramatically and imposed a storm of taxes; it could also use some money left over from the borrowing of the last three years. Even so, it is highly unlikely to make up the entire sum, particularly as its own finances for 2015-16 remain uncertain. This is the immediate reason why Greece might need a fresh package, perhaps up to €20bn.
The real problem, however, is longer term. The growth potential of Greece has been devastated during the last three years, and the EU policies of cutting wages and privatising public assets at knock-down prices are making things worse. Furthermore, the rescue programme obliges the country to generate a primary fiscal surplus of 4.5% of GDP by 2016 to repay its debt. Imposing austerity on this scale in the midst of unprecedented recession is disastrous, not to mention preposterous. Under these conditions the burden of enormous Greek debt is unbearable, even at rates of 2% and with longer maturities. Interest payments alone will be roughly €7bn annually, a major charge on a shrunken GDP.
So, what should be done? It is time for Greece to show some gumption and stop accepting conditions dictated by German politics. The country does not need another rescue package that would bring a continuation of austerity policies, possibly with some further ineffectual restructuring of its debt. Greece must have a moratorium on debt payments followed by genuine restructuring of its debt, including deep write-offs. This must be accompanied by a lifting of the disastrous policies of austerity and wage cuts. On this basis, the economy could be placed on a different footing that would restore growth potential with social justice.
Germany is implacably opposed to such a prospect and is likely to raise the spectre of exiting the EMU. But we are no longer in 2010. It is now openly acknowledged that the common currency has caused economic and social devastation in the periphery, while increasingly constraining the economies of the core. There is lively debate on the viability and desirability of the euro in France, Spain, Italy, and even Germany. The policies to defend the euro since 2010 have not only destroyed Greece but disrupted the unity of Europe as a whole, putting at risk the entire postwar settlement. If Greece is threatened with exit from this rickety and absurd mechanism, it should not blink but do what is necessary to save its economy and its people.
The current Greek government is, of course, incapable of following such a strategy since it is entirely subservient to the lenders. The only hope lies with the left, led by the official opposition, the party of Syriza. There is profound anger and despair in the country that has rebounded mostly to the benefit of Syriza but also of the fascist right. A government on the left offers a chance to restore some sanity to Greece, helping to change the course of the continent before the ghosts of the past really make a comeback.
Greece does not need another rescue package but a wholesale change of direction. Perhaps even German politicians might then understand what they have truly created in Europe.
There is no doubt that the Greek programme has failed. In 2010 Greek public debt was just over €300bn, mostly privately held, two thirds of it by lenders abroad and governed by Greek law. The rational option would have been for Greece to declare default, seek a rapid restructuring of its debt and place its economy on a new footing. This would probably have meant exiting the European Monetary Union, a move with considerable costs but also major advantages in allowing the Greek economy to make a fresh start.
Instead, the EU, led by Germany, decided to "rescue" Greece by offering it massive fresh borrowing, while forcing it to submit to severe austerity and wage cuts. The results have been catastrophic: cumulative economic contraction approaching 25%, adult unemployment at nearly 30%, youth unemployment close to 65%, unprecedented poverty, destruction of the welfare state and humanitarian crisis in the urban centres. Greek debt, meanwhile, is currently higher than in 2010, standing at €321bn and, since the economy has collapsed, its ratio to GDP approaches an exorbitant 180%. This is the background to the current debate.
The "rescue" programme has already included a restructuring of Greek debt. Some of it was written off, although most of the losses actually fell on Greek lenders – banks, pension funds and small savers. Its maturity has been lengthened substantially and interest rates have come down dramatically to just over 2%.
The problem is that in 2014-15 Greece must still make debt payments of more than €40bn and, since the rescue programme is ending in 2014, it is not clear where these funds will come from. The government has cut spending dramatically and imposed a storm of taxes; it could also use some money left over from the borrowing of the last three years. Even so, it is highly unlikely to make up the entire sum, particularly as its own finances for 2015-16 remain uncertain. This is the immediate reason why Greece might need a fresh package, perhaps up to €20bn.
The real problem, however, is longer term. The growth potential of Greece has been devastated during the last three years, and the EU policies of cutting wages and privatising public assets at knock-down prices are making things worse. Furthermore, the rescue programme obliges the country to generate a primary fiscal surplus of 4.5% of GDP by 2016 to repay its debt. Imposing austerity on this scale in the midst of unprecedented recession is disastrous, not to mention preposterous. Under these conditions the burden of enormous Greek debt is unbearable, even at rates of 2% and with longer maturities. Interest payments alone will be roughly €7bn annually, a major charge on a shrunken GDP.
So, what should be done? It is time for Greece to show some gumption and stop accepting conditions dictated by German politics. The country does not need another rescue package that would bring a continuation of austerity policies, possibly with some further ineffectual restructuring of its debt. Greece must have a moratorium on debt payments followed by genuine restructuring of its debt, including deep write-offs. This must be accompanied by a lifting of the disastrous policies of austerity and wage cuts. On this basis, the economy could be placed on a different footing that would restore growth potential with social justice.
Germany is implacably opposed to such a prospect and is likely to raise the spectre of exiting the EMU. But we are no longer in 2010. It is now openly acknowledged that the common currency has caused economic and social devastation in the periphery, while increasingly constraining the economies of the core. There is lively debate on the viability and desirability of the euro in France, Spain, Italy, and even Germany. The policies to defend the euro since 2010 have not only destroyed Greece but disrupted the unity of Europe as a whole, putting at risk the entire postwar settlement. If Greece is threatened with exit from this rickety and absurd mechanism, it should not blink but do what is necessary to save its economy and its people.
The current Greek government is, of course, incapable of following such a strategy since it is entirely subservient to the lenders. The only hope lies with the left, led by the official opposition, the party of Syriza. There is profound anger and despair in the country that has rebounded mostly to the benefit of Syriza but also of the fascist right. A government on the left offers a chance to restore some sanity to Greece, helping to change the course of the continent before the ghosts of the past really make a comeback.
Greece does not need another rescue package but a wholesale change of direction. Perhaps even German politicians might then understand what they have truly created in Europe.
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