Category Archives: Political Economy, Greek Debt

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

The Greek Debt Crisis, Pt. I

After five years of austerity, the Greek economy remains in crisis. Its national GDP has contracted by about 30%, as much as the American economy during the Great Depression, unemployment levels hover above 25% and pension cuts have totaled as much as 50%, leaving many retirees to live at near poverty levels. Nevertheless, members of the European Union, along with the ECB and the IMF, the so-called troika, remain critical of what it deems the profligate habits of the Greek government. Are they right to be dismissive?

In the last five years, Greece received $252 billion, more than its total GDP for 2013. It is a truly staggering sum. So why does the Greek government still require bailout assistance? Where did all that money go? Is the Greek government simply irresponsible? Remarkably, only about 11% of the funds received by Greece went to pay for the government’s operational needs, for example, its social services and pension contributions. A whopping 50% of the money went to pay creditors and to recapitalize banks because of a high percentage of bad loans.  Another 20% went to pay for interest on outstanding debt.  In other words, more than two thirds of the bailout money Greece received, about $175 billion by my rough calculation, went to creditors and banks, rather than to the Greek government or its citizens.  Most of the bailout money never remained in Greece because many of its creditors are foreign banks and hedge funds.  So much for profligate governmental spending. What we have here is a classic case of borrowing from Peter to pay Paul designed to make creditors whole.

The demand for continued austerity indicates that European officials have forgotten an invaluable lesson dispensed by John Maynard Keynes, the architect of the policies that rescued America from the Great Depression. Keynes argued that the way out of economic recession or depression involved putting more money in the pockets of more people. He reasoned that when the private sector could not create more jobs and raise income levels on its own, the public sector needed to temporarily perform this function. By insisting on balancing budgets during recessionary periods, preventing the public sector from doing what the private sector could not do, there would be less money in the hands of consumers. They would spend less, resulting in further business contraction, and pay fewer taxes, reducing government coffers, creating an ominous downward spiral.

The recent negotiation with the Greek government did not feature a constructive dialogue about sources of economic growth that would increase the population’s disposable income, allowing businesses to expand and government revenues to increase.  Rather, the debate centered on wringing more concessions in exchange for more bailout money.  We want to be clear: continued austerity will stifle future growth rather than promote it.  And if there is no opportunity to generate expansion in the medium and long term, the national economic pie will continue to stagnate or contract.

It should be noted that Greece’s debt totals $354 billion, a phenomenal 177% of its GDP, the second-highest national debt in the world. Interestingly, the IMF released a report after a deal was cut, indicating it would not participate in further negotiations as a member of the troika because it considered current levels of Greek debt to be unsustainable. We shall see if the IMF’s position inflames Greek sentiment against the current deal, that many consider to be tantamount to blackmail with its forced sale of public assets, and/or prompts the EU and ECB to include debt relief in its aid package to Greece.


Neal Aponte, Ph.D.
Editor of Delano