The Greek Debt Crisis, Pt. II

The IMF’s recent statement about the need for Greek debt relief underscores the obvious. But it also highlights a political failure of the Tsipras government, which spent the last several months trying to soften the EU, ECB and IMF’s relentless demand for continued austerity. That was never going to happen. Accordingly, Greece missed a valuable opportunity because it is not the only European nation wrestling with a debt crisis. The governments of Italy, Spain, France and Portugal have all been ordered to get their financial house in order. While the Greeks tried to persuade the troika, it should have also negotiated with other nations to forge a united front against austerity. Instead, they tried to intimidate with intransigence and bravado, culminating in the call for a national referendum. Of course, they wildly miscalculated. Not only did the troika reiterate its implacable demand, it solidified support for its posture from the governments of France, Italy and Spain.

Keynes famously quipped: if I owe you one dollar, it is my problem. If I owe you a million dollars, it is your problem. There was safety for Greece in the political rather than financial numbers, in leveraging the power of a unified response to the troika. If the Greek government spearheaded an effort to establish a joint proposal limiting, say, the amount of austerity undertaken by any nation, demanding some form of debt relief and asserting the need for more stimulus to promote growth, would the troika have simply refused, risking economic instability and perhaps even the collapse of the Eurozone? In the absence of any coalition, Tsipras was widely perceived to be asking for a “special” deal, prompting other European governments, even those sympathetic to Greece, to believe he was trying to get away with something at their expense, e.g., maintaining Greek at the expense of Italian pensions.

What opportunity did the Greeks have to establish a coalition? Well, political developments in other European nations suggested they had a reasonable chance of success. France’s current Prime Minister, François Hollande, was elected opposing austerity and promising to articulate an alternative response to the economic crisis. Members of his Socialist party have strenuously objected to the troika’s policy. Spain’s anti-austerity party, Podemos, garnered 15 seats in a regional parliamentary election earlier this year and there were large protests in major Spanish cities. And Italy’s center-left Prime Minister has also called for a loosening of fiscal austerity. But Tsipras did not capitalize on widespread European disaffection, leaving his government to “hang separately”.

Tsipras and the troika played a fruitless game, the former tried to change the position of the latter and the latter simply wanted to wring more concessions from the former. Nevertheless, we are not suggesting that ongoing reforms, for instance, ensuring more effective tax collection, reducing political favoritism in labor markets and continued pension reform, in Greece and elsewhere, are unnecessary. But as reform efforts are made, we must be mindful that the best outcome for everyone, including creditors, involves renewed economic growth. If the logic of austerity is unchecked, the economies of Greece and other southern Europe nations will remain stagnant with stifling debt levels. And as demands for budget cutbacks and debt repayment continue to strangle prospects for growth and prosperity in these countries, condemning, for instance, a whole generation of young adults to chronic or perhaps even lifetime unemployment, the project of economic union will eventually unravel. In turn, the ranks of more extremist parties and movements on both sides of the spectrum will swell and elevate the risk of political and social instability.

 

Neal Aponte, Ph.D.
Editor of Delano

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