Greece and the Euro Zone
German chancellor Angela Merkel is nothing if not the embodiment of pragmatism. It is time that she demonstrates that trait with regard to Greece. In 2009, the chancellor did a pivot on the matter of economic stimulus. More recently, she changed course on her policy on the minimum wage as well as her position on Jean-Claude Juncker for president of the European Commission. Most prominently, she made a 180-degree turn on nuclear power, the famous Energiewende. It is now high time for a similar pragmatic change of course on the matter of European debt: a Schuldwende.
“Greece’s debt IS unsustainable; most of the money being lent to Greece by Germany and its other partners IS going to pay the interest, not the principal (so the debt is not shrinking); Greece’s debt HAS worsened under the Troika program, not declined (contrary to what the Troika had predicted in the early stages of this crisis, which now seems like centuries ago).” ~ Steven Hill, New American Foundation
The German-inspired approach to the euro zone crisis is now in its seventh year and is not working. Its cost is being borne by the Greek middle and working classes and by Greek youth, not those responsible for creating the mess. The time for change is overdue.
Despite the morality-play narrative emanating from Berlin regarding the debt negotiations, German actions have not themselves been entirely pure. In 2002, Germany, along with France, began the process of easing the strict rules of the Maastricht Treaty when it was able to get an exemption from the cap on budget deficits at 3 percent of GDP, essentially scrapping the Stability and Growth Pact. German banks also had their eyes wide open in awarding loans to Greece and the other weaker European economies, throwing prudential caution aside. In fact, some major financial and corporate entities have allegedly facilitated deceptions by earlier Greek governments or to have been involved in outright corruption in connection with some loans. Then, there is also the inconvenient fact that outstanding German debt is itself well above the 60 percent cap in the euro zone ground rules. Another inconvenient fact is that just 11 percent of the facilities extended to Greece have been used to support the Greek state, as the facilities have ultimately been used to prop up the banking sector in the lending countries.
Although Germany was not responsible for the financial collapse of 2008 that set the stage for the long crisis in the euro zone, its neo-mercantilist economic and trade policies, which one Philippe Legrain dubbed Merkelism, has exacerbated the situation and impeded an effective response. Germans take justifiable pride in the excellent quality of their industrial products, which produced yet another record trade surplus of €215 billion in 2014, second only to China. Yet, large balance of trade surpluses in Germany mean that other European countries are running large balance of trade deficits, which exert downward pressure on those other economies. The counter that other countries should attempt to be more like German industry rings only partially true. Once again, Germany is itself not adhering to European rules in that a trade surplus of 7.4 percent of GDP well exceeds the target cap under the Macroeconomic Imbalance Procedure. Even worse, that cap was set abnormally high as, on the flip side, euro zone countries are not supposed to run trade deficits greater than 4 percent of GDP. The very rules build in and sanction a balance of trade advantage to Germany. This advantage is enabled not just by German industrial competitiveness but by the fact that the euro confers a much more favorable exchange rate than were Germany still operating under its own independent Deutsche Mark. This fact has led some commentators to brand Germany a stealth currency manipulator and even for the country itself to be removed from the euro zone.
At 175 percent of GDP, it is clear to everyone that Greece will never be able to repay all of this debt, but domestic politics—not economic reality or the best interest of the euro zone overall—are dominating the decisions on Greece from Germany to even other highly-indebted countries. In the present environment writing down some of the debt is not on the table. Given the already low interest rates and long maturities of current Greek debt, the usual remedies of lower interest rates or extending the loans are not effective. There are several common sense actions that can and should be taken. First, Greece should be given some interim relief in the required primary budget surplus—projected to be 3-4.5 percent—until growth resumes in earnest, provided that the government continue to take reasonable efforts to get control of the public sector and to address once and for all the longstanding issue of tax evasion. In this, Syriza is probably particularly well-suited to the task. Second, higher-interest IMF loans should be refinanced in Europe, which would disband the Troika. Third, even recognizing past issues with data manipulation, tying the payment of Greece’s debt to GDP growth and therefore its ability to pay seems reasonable. It also would have the further benefit of aligning the interest of all parties—north and south—to the resumption of growth. Finally, since none of the above measures actually address the core problem of the size of outstanding debt, serious attention should be paid to the proposal by economists Peter Allen and Barry Eichengreen to use some form of debt-for-equity swaps to reduce debt. Furthermore, since the debt crisis involves more than just Greece, this approach should be studied for extension to all heavily-indebted countries as a prelude to much-needed structural reform of the entire euro zone.
When a policy long-tried is clearly failing, it is just common sense to step back and try another approach. This is necessary to ameliorate human suffering and to avoid a lost decade in Europe from extending into a second lost decade. Yet, the imperative for making this change is not just economic. All across Europe Euroskeptic parties are on the rise. The failure of the current far-left party in Athens could be followed by a far less reasonable party from the far right and encourage similar voices elsewhere on the continent. The failure to provide succor and a path forward from Brussels and Berlin might result in the much discussed Grexit by accident or by design. Perhaps this would not lead to the falling dominoes of other exits, but that is far from certain. Of greater concern would be a Grexit accompanied by Athens looking east for support. Europe has already played its hand very poorly in Ukraine and does not need to worry about recent rumors of the Russian fleet finding port in Cyprus to be followed by talk of the Russian fleet in Athens. Then again China might find Greece an inviting target for its ambitious and expanding infrastructure financing. In the words of Paul Krugman: “Can [we] get past the myths and the moralizing, and deal with reality in a way that respects the Continent’s core values? If not, the whole European project—the attempt to build peace and democracy through shared prosperity—will suffer a terrible, perhaps mortal blow.”