Let Greece Breathe

The EU Needs to Negotiate on Debt

Of all the countries affected by the euro crisis, Greece has been hit the hardest. A quarter of the Greek population is currently unemployed. In the years between 2007 and 2013, the country’s per-capita GDP fell by 26 percent, while its debt-to-GDP ratio reached 175 percent. Greece now owes its creditors about $300 billion, and few expect that it will ever be able to pay it all back.

Much of Greece’s suffering has been self-inflicted. No other EU government borrowed quite as recklessly as Greece’s center-right government did in the years leading up to the crisis. Because of widespread tax evasion, Greece couldn’t bring in enough revenue to pay its bills; because of rampant corruption, it squandered what little revenue it managed to collect. To make up for its massive fiscal shortfalls, it turned to foreign lenders, who were more than happy to help, confident that, however irresponsible Greece’s leaders might be, the EU would never allow a member of its monetary union to default.

The creditors were right: when an international debt crisis hit the continent, the European Commission, the European Central Bank, and the International Monetary Fund—together known as the “troika”—reluctantly rescued Greece with two bailouts, one in 2010 and another two years later. But the bailouts came with strings attached. In return for emergency loans, Greece had to agree to a program of harsh fiscal austerity, which only increased the economic distress caused by the crisis itself. Pensions were cut, salaries frozen. Many public-sector workers lost their jobs. Valuable public assets, including Greece’s main port, were put up for sale. Prime Minister Antonis Samara begged the troika to let him relax the austerity measures, but the consensus in Europe, and especially in Germany, was that Greece had to be disciplined. Desperate for international assistance, Samara complied with EU demands, despite growing outrage among Greek voters.

On January 25, a new left-wing anti-austerity party called Syriza defeated Samara’s New Democracy Party at the polls. The new prime minister, Alexis Tsipras, immediately pledged to reverse some of the most painful reforms undertaken by his predecessors at the behest of the troika. His government would raise the minimum wage, increase pensions, suspend privatizations, and provide more support to those most affected by the recession. Above all, Tsipras and his finance minister, Yanis Varoufakis, would stand up to the technocrats in charge of the eurozone and demand that Greece be allowed to spend more of its revenue on meeting the needs of its people and less on servicing its debt.

Syriza’s victory at the polls and its apparent willingness to make good on its bold campaign promises have annoyed nearly every other country in Europe. Having implemented severe fiscal programs in their own countries, governments in Spain, Portugal, and Ireland worry about how voters will react once they discover that there might have been an alternative to austerity after all. France and Italy are unwilling to let Greece off the hook because much of its debt is owed to French and Italian banks. Germany is annoyed at Greece’s general lack of gratitude and contrition, and fears that yielding to Syriza’s demands will give other countries the idea that they can spend beyond their means with impunity. Above all, Germany is worried that the euro will lose value because of an irresponsible Greek government. Germans still haven’t forgotten the damage hyperinflation did to their country’s economy in the 1920s.

Unfortunately, Germans do seem to have forgotten that Germany was the beneficiary of debt forgiveness several times in the twentieth century, after their country made mistakes far worse than Greece’s. As the economic historian Benjamin Friedman told a group of central-bank governors last summer, “There is no economic ground for Germany to be the only European country in modern times to be granted official debt relief on a massive scale and certainly no moral ground either.”

Greek voters have clearly signaled their unwillingness to let Germany’s over-scrupulous (and highly selective) sense of fiscal hygiene keep the Greek economy from recovering. If the European Union’s commitment to democracy is genuine, it cannot afford to ignore this signal—any more than it can afford to ignore the concerns of German voters. The EU’s governing institutions must not treat national elections as if they were nothing more than a way for the dissatisfied masses to blow off steam. EU officials should at least be willing to negotiate with the new Greek government, which is asking not that its nation’s debt be forgiven but that it be restructured, so that Greece can use more of its modest resources to take care of its own citizens. It’s time for the troika to take its foot off Greece’s neck.

Published in the March 6, 2015 issue: 
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