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| lexis Tsipras, the prime minister of Greece, greets supporters after a rally of the governing Syriza party. Photograph: Sotiris Barbarousis/Sotiris Barbarousis/epa/Corbis |
PAUL KRUGMAN, NY TIMES
It has been obvious for some time that the creation of the euro was a terrible mistake. Europe never had the preconditions for a successful single currency — above all, the kind of fiscal and banking union that, for example, ensures that when a housing bubble in Florida bursts, Washington automatically protects seniors against any threat to their medical care or their bank deposits.
Leaving a currency union is, however, a much harder and more frightening decision than never entering in the first place, and until now even the Continent’s most troubled economies have repeatedly stepped back from the brink. Again and again, governments have submitted to creditors’ demands for harsh austerity, while the European Central Bank has managed to contain market panic.
But the situation in Greece has now reached what looks like a point of no return. Banks are temporarily closed and the government has imposed capital controls — limits on the movement of funds out of the country. It seems highly likely that the government will soon have to start paying pensions and wages in scrip, in effect creating a parallel currency. And next week the country will hold a referendum on whether to accept the demands of the “troika” — the institutions representing creditor interests — for yet more austerity.
Greece should vote “no,” and the Greek government should be ready, if necessary, to leave the euro.
To understand why I say this, you need to realize that most — not all, but most — of what you’ve heard about Greek profligacy and irresponsibility is false. Yes, the Greek government was spending beyond its means in the late 2000s. But since then it has repeatedly slashed spending and raised taxes. Government employment has fallen more than 25 percent, and pensions (which were indeed much too generous) have been cut sharply. If you add up all the austerity measures, they have been more than enough to eliminate the original deficit and turn it into a large surplus.
o why didn’t this happen? Because the Greek economy collapsed, largely as a result of those very austerity measures, dragging revenues down with it.
And this collapse, in turn, had a lot to do with the euro, which trapped Greece in an economic straitjacket. Cases of successful austerity, in which countries rein in deficits without bringing on a depression, typically involve large currency devaluations that make their exports more competitive. This is what happened, for example, in Canada in the 1990s, and to an important extent it’s what happened in Iceland more recently. But Greece, without its own currency, didn’t have that option.
So have I just made the case for “Grexit” — Greek exit from the euro? Not necessarily. The problem with Grexit has always been the risk of financial chaos, of a banking system disrupted by panicked withdrawals and of business hobbled both by banking troubles and by uncertainty over the legal status of debts. That’s why successive Greek governments have acceded to austerity demands, and why even Syriza, the ruling leftist coalition, was willing to accept the austerity that has already been imposed. All it asked for was, in effect, a standstill on further austerity.
But the troika was having none of it. It’s easy to get lost in the details, but the essential point now is that Greece has been presented with a take-it-or-leave-it offer that is effectively indistinguishable from the policies of the past five years.
This is, and presumably was intended to be, an offer Alexis Tsipras, the Greek prime minister, can’t accept, because it would destroy his political reason for being. The purpose must therefore be to drive him from office, which will probably happen if Greek voters fear confrontation with the troika enough to vote yes next week.
But they shouldn’t, for three reasons. First, we now know that ever-harsher austerity is a dead end: after five years Greece is in worse shape than ever. Second, much and perhaps most of the feared chaos from Grexit has already happened. With banks closed and capital controls imposed, there’s not that much more damage to be done.
Finally, acceding to the troika’s ultimatum would represent the final abandonment of any pretense of Greek independence. Don’t be taken in by claims that troika officials are just technocrats explaining to the ignorant Greeks what must be done. These supposed technocrats are in fact fantasists who have disregarded everything we know about macroeconomics, and have been wrong every step of the way. This isn’t about analysis, it’s about power — the power of the creditors to pull the plug on the Greek economy, which persists as long as euro exit is considered unthinkable.
So it’s time to put an end to this unthinkability. Otherwise Greece will face endless austerity, and a depression with no hint of an end.
JOSEPH STIGLITZ, THE GUARDIAN
The rising crescendo of bickering and acrimony within Europe might seem to outsiders to be the inevitable result of the bitter endgame playing out between Greece and its creditors. In fact, European leaders are finally beginning to reveal the true nature of the ongoing debt dispute, and the answer is not pleasant: it is about power and democracy much more than money and economics.
Of course, the economics behind the programme that the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund) foisted on Greece five years ago has been abysmal, resulting in a 25% decline in the country’s GDP. I can think of no depression, ever, that has been so deliberate and had such catastrophic consequences: Greece’s rate of youth unemployment, for example, now exceeds 60%.
It is startling that the troika has refused to accept responsibility for any of this or admit how bad its forecasts and models have been. But what is even more surprising is that Europe’s leaders have not even learned. The troika is still demanding that Greece achieve a primary budget surplus (excluding interest payments) of 3.5% of GDP by 2018.
Economists around the world have condemned that target as punitive, because aiming for it will inevitably result in a deeper downturn. Indeed, even if Greece’s debt is restructured beyond anything imaginable, the country will remain in depression if voters there commit to the troika’s target in the snap referendum to be held this weekend.
In terms of transforming a large primary deficit into a surplus, few countries have accomplished anything like what the Greeks have achieved in the last five years. And, though the cost in terms of human suffering has been extremely high, the Greek government’s recent proposals went a long way toward meeting its creditors’ demands.
We should be clear: almost none of the huge amount of money loaned to Greece has actually gone there. It has gone to pay out private-sector creditors – including German and French banks. Greece has gotten but a pittance, but it has paid a high price to preserve these countries’ banking systems. The IMF and the other “official” creditors do not need the money that is being demanded. Under a business-as-usual scenario, the money received would most likely just be lent out again to Greece.
But, again, it’s not about the money. It’s about using “deadlines” to force Greece to knuckle under, and to accept the unacceptable – not only austerity measures, but other regressive and punitive policies.
But why would Europe do this? Why are European Union leaders resisting the referendum and refusing even to extend by a few days the June 30 deadline for Greece’s next payment to the IMF? Isn’t Europe all about democracy?
In January, Greece’s citizens voted for a government committed to ending austerity. If the government were simply fulfilling its campaign promises, it would already have rejected the proposal. But it wanted to give Greeks a chance to weigh in on this issue, so critical for their country’s future wellbeing.
hat concern for popular legitimacy is incompatible with the politics of the eurozone, which was never a very democratic project. Most of its members’ governments did not seek their people’s approval to turn over their monetary sovereignty to the ECB. When Sweden’s did, Swedes said no. They understood that unemployment would rise if the country’s monetary policy were set by a central bank that focused single-mindedly on inflation (and also that there would be insufficient attention to financial stability). The economy would suffer, because the economic model underlying the eurozone was predicated on power relationships that disadvantaged workers.
And, sure enough, what we are seeing now, 16 years after the eurozone institutionalised those relationships, is the antithesis of democracy: many European leaders want to see the end of prime minister Alexis Tsipras’ leftist government. After all, it is extremely inconvenient to have in Greece a government that is so opposed to the types of policies that have done so much to increase inequality in so many advanced countries, and that is so committed to curbing the unbridled power of wealth. They seem to believe that they can eventually bring down the Greek government by bullying it into accepting an agreement that contravenes its mandate.
It is hard to advise Greeks how to vote on 5 July. Neither alternative – approval or rejection of the troika’s terms – will be easy, and both carry huge risks. A yes vote would mean depression almost without end. Perhaps a depleted country – one that has sold off all of its assets, and whose bright young people have emigrated – might finally get debt forgiveness; perhaps, having shrivelled into a middle-income economy, Greece might finally be able to get assistance from the World Bank. All of this might happen in the next decade, or perhaps in the decade after that.
By contrast, a no vote would at least open the possibility that Greece, with its strong democratic tradition, might grasp its destiny in its own hands. Greeks might gain the opportunity to shape a future that, though perhaps not as prosperous as the past, is far more hopeful than the unconscionable torture of the present.
THE GUARDIAN {EDITORIAL)
both sides in this clash have motives of their own, not all of them unconnected with democracy. The creditors point to some of Europe’s poorest nations, the likes of Portugal and Ireland, whose voters have endured their own austerity and who would look askance if Greece were now let off the hook. Even the reviled IMF can explain its hard line: given the bitter programmes it has imposed on countries from the global south, it can hardly now be lenient towards a European country that is, relatively, better off.
Greece’s woes are not wholly of others’ making. Witness the decades of clientelist Greek politics of left and right, the notoriously poor tax collection, and the fudging of statistics when the country joined the euro in 2001. Much of this predated Alexis Tsipras and Syriza, but it’s also true that the party won power in January partly by promising that less would have to change than, in reality, it would.
JAMES STEWART, NY TIMES
Greece is hardly the first nation to face the prospect of defaulting on its sovereign debt obligations. Argentina has defaulted on its external debt no fewer than seven times since gaining independence in 1816, most recently last year. But it’s Argentina’s 2001 default on nearly $100 billion in sovereign debt, the largest at the time, that poses a cautionary example for Greece.
Like Greece today, Argentina had endured several years of hardship and austerity by 2001. It borrowed heavily from the International Monetary Fund, the World Bank and the United States, all of which demanded unpopular spending cuts. The I.M.F. withheld payments when Argentina (like Greece) failed to meet its deficit targets. A bank run led the government to freeze deposits, which set off riots and street demonstrations. There were deadly confrontations between police and demonstrators in the heart of Buenos Aires, and the president at the time, Fernando de la Rúa, fled by helicopter in December. In the last week of 2001, Argentina defaulted on $93 billion in sovereign debt and subsequently sharply devalued the peso, which had been pegged to the dollar.
In addition to social unrest and a wave of political instability (at one point, the country had three presidents in four days), Argentina’s economy plunged into depression. Tens of thousands of the unemployed scavenged the streets collecting cardboard, an enduring image that gave rise to the term “cartoneros.” Dollar-denominated deposits were converted to pesos, wiping out over half their purchasing power.
Despite this trauma, the Argentine economy stabilized in 2002. The country was able to repay the I.M.F. in full by 2006. But the country has never re-entered the international debt markets. It has refused to comply with a ruling by a United States federal court judge that the country must repay in full private creditors who did not participate in the country’s debt restructuring. As a result, Argentina defaulted again last year, and the standoff continues.
Even without much external financing, Argentina’s economy has fared relatively well since 2002, leading some economists, notably Mark Weisbrot of the Center for Economic and Policy Research in Washington, to suggest that Greece should default, suffer the short-term pain and follow Argentina’s example.
Argentina’s economic recovery was largely driven by a fortuitously timed surge in commodity exports driven by demand from fast-growing Brazil and China. (Although the commodity boom is long over, and Argentina’s economy today is at best stagnating, those two countries still account for about 28 percent of its exports.) Soybean meal, corn and soybean oil are the country’s top three exports. Argentina had a population of over 41 million and gross domestic product of $610 billion in 2013. Although it’s a net importer of energy, it has vast shale oil and gas reserves that could make it self-sufficient.
Greece, by contrast, is heavily dependent on imports. Its top three are crude oil, refined petroleum and pharmaceuticals, all necessities. While its top export is also refined petroleum, it has to import crude oil for its refineries. Its only major homegrown exports are fresh fish and cotton. It would be hard to significantly increase sales of either product: The European Union has strict quotas to prevent overfishing, while cotton production is struggling from reduced demand for textiles and a lack of bank financing.
If the country left the European Union and brought back a sharply devalued drachma, they’d gain some from tourism, but they’ve already cut prices and tourism has gone up. But it hasn’t really helped because total revenue hasn’t gone up.
And compared with Argentina, Greece is tiny, with a population of just over 11 million and gross domestic product of $242 billion in 2013. Argentina is a resource-rich country that, if forced to, can live with its own resources. The economic viability of Greece on its own has never been tested since 1981, when Greece joined the European Union.
Everyone pretty much agrees that, if Greece could devalue its currency, as did Argentina, its economy would benefit. But it was also relatively easy for Argentina to devalue the peso by severing its link to the United States dollar, a tie that was self-imposed. Greece doesn’t have a currency that’s pegged to the euro: it has the euro. The practical challenge of disseminating a new currency would be enormous. Moreover, Greek savings now denominated in euros (and, in many cases, deposited in European banks outside Greece) can’t be converted to drachmas, as the Argentines converted savings into pesos.
Converting to the drachma would also be a crushing blow to the private sector, much of which finances its activities with euro-denominated loans from non-Greek banks. Greek companies have a lot of cross-border obligations. The European Central Bank has kept Greek banks alive. Its collateral would be worth only a small fraction if Greece leaves the euro. The Greek banks would be insolvent immediately.
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| Greece’s finance minister, Yanis Varoufakis, Credit Alkis Konstantinidis/Reuters |
Yanis Varoufakis, Greece’s firebrand finance minister advocates standing up to the European Union’s demands, but, while conceding that leaving the euro would be a disaster, he still contends a Greek default would be manageable and give Greece more leverage in longer-term negotiations to keep Greece in the European Union and eurozone.
No matter how much worse it might be for Greece than Argentina, the outcome will ultimately be determined by politics, not economics. Economists are terrible at predicting political outcomes.
Do the Greek people know they’re playing with fire and might get burnt? It’s what they voted for, and they seem to have voted with their eyes wide open. Not everyone values prosperity the same way as people in the United States and most of Europe do.
For others, which evidently includes many Greeks, ceding national sovereignty to foreign lenders may be worse than economic chaos. As Mr. Varoufakis wrote, “I salute the Argentinian people for having toppled a regime, and more than one government, that tried so desperately to sacrifice a proud people on the altar of I.M.F.-led austerity.”
People in countries like Venezuela and Cuba have tolerated failed economies and low standards of living for years, and the Russians seem all too willing to follow President Vladimir Putin into recession. Populism and nationalism, are still potent forces.