Saturday, 3 January 2015

Revolt of the debtors

The Greek debt crisis that erupted in 2010 is back, and again threatens the stability of the Eurozone. That crisis was the result of two factors. First, an unbridled spending drift of both the private and the public sectors in Greece during the boom years of 2000-2010, which led to unsustainable large levels of debt. Second, reckless lending to Greece by Northern Eurozone banks. At no time the Northern bankers asked themselves the question of whether the Greeks would repay the loans.
The European Unions chose to resolve the debt crisis by punishing the Greeks and by saving the Northern banks. A punitive austerity program was imposed on Greece, whose effects are now visible everywhere in this country. A decline in GDP of close to 25% since 2010, a rise in unemployment to a level we have not seen since the nineteen thirties, and impoverishment of large parts of the Greek population.
The banks went largely unpunished. True there was a debt restructuring of the Greek debt held by private investors. Some banks paid the price of excessive credit granted to Greece, but most banks escaped this fate by dumping their Greek claims onto the public sector. Those claims are now in the hands of national governments and the European Central Bank. And these want to have their money back whatever the consequences may be for the Greek people and the Greek political system.
The official narrative of this approach is that the intense austerity that was imposed on  the Greek population is inevitable and in the end will bear fruit.
Inevitable? Yes, of course, if the intention is to safeguard the interests of the creditors then there is indeed only one possibility: the Greeks have to pay the full price.
Will it pay off in the end? Yes, of course if austerity is maintained long enough it will succeed in creating surpluses and transfers of resources from Greece towards the rich North of the Eurozone.
This narrative, however, loses sight of the political upheavals triggered by the human misery that results form intense austerity. The millions of people who are pushed into misery by the creditors from the North of Europe are not passive subjects. They not only protest in the streets, something the creditors can easily live with. They also vote for those political parties that promise them that there is a better way to deal with the problem. And these are the parties that are out to break the established political and social order.
It is appalling to see that the European political elite has been living in a cocoon, failing to take into account the political and social implications of the intense austerity programs they imposed in countries like Greece (but also in other countries of the periphery). This political elite still has not learned the lessons. The first reaction of the German minister of finance after the announcement of new elections in Greece was that the discipline needed to be continued rigorously.
What is to be done? Much will depend on the election results in Greece. The far-left party, Syriza, seeks to weaken the intensity of the austerity programs and to negotiate a debt restructuring with the European authorities.
It is quite surprising to find out that these demands, in fact, are based on a correct analysis of the Greek problem. Despite the austerity, that has been extraordinarily intense, the Greek public debt has increased and now exceeds 170% of GDP. The burden of this debt is so high that future Greek governments will not be able to continue to service it.
Instead of denying this reality the EU finance ministers should start facing it. They should begin to think about how they can ease the debt burden of Greece. Denying this reality condemns Greece to many more years of misery and will encourage extremist political movements in the country even further.
The risk today is that the political leaders of the Eurozone refuse to relieve the Greek debt (and that of other countries of the periphery). In that case, a fundamental crisis in the Eurozone is inevitable. Even if Syriza does not make it at the coming election, extremist parties will gain the upper hand in future elections. This will be very disruptive for the Eurozone as a whole.

History teaches us that after a debt crisis a balance must be found between the interests of creditors and debtors. The unilateral approach that has been taken in the Eurozone in which the debtors have been forced to bear the full weight of the adjustment almost always leads to a revolt of these debtors. That is now underway in Greece. It can only be stopped if creditors dare to face this reality.


  1. Conclusion: What we need is a thourough analysis of how financial power elite, by what means, organizations and people controle the E.U. and E.C.B. authorities. And once done, for the sake of democracy, this scientific analysis should be made public and common knowledge.

  2. Could not agree more, Dr. De Grauwe.

  3. En wie mag het weer betalen. Waarom moest er steeds weer geld geleend worden aan Griekenland. 's-Nachts hoor ik steeds weer minister de Jager zeggen dat de leningen tot de laatste cent wordt terug betaald. En dit terwijl ieder mens met een beetje gezond verstand kon weten dat dit onmogelijk was. Hoe komen we toch steeds weer aan zulke onbenullige politici. Laat de Jager het maar betalen. Hoe is het mogelijk dat zo'n man nu weer financieel topman van KPN wordt. Wie wil er nog klant bij zo'n hopeloos bedrijf zijn?

  4. Totally agree with you. There is urgent need of less austerity and much more public and private investment.

  5. This article, like many others, deems Greece’s biggest problem to be the level of its sovereign debt. I disagree with this assessment. According to the state budget, Greece’s debt service (interest expense) for 2014 was 5,7 BEUR. Perhaps that number goes up a bit when other entities are included. At the same time, it would go down if and when Greece receives the interest rebates from the ECB (over 2 BEUR). To allocate about 4% of GDP to debt service is a lot more than zero but certainly not a high percentage in comparison. Not only in comparison with other countries but, particularly, with Greece’s own history.

    With some tough negotiating, Greece could probably reduce this percentage to 2% or even less (perhaps even with some interest capitalization) and it could reschedule maturities way out in the future so that there would not be refinancing requirements for a long time.

    Greece's real debt problem is a domestic one (70 BEUR in non-performers, arrears of the government, 70 BEUR in unpaid taxes, etc.). Here I would like to see proposed solutions which do not involve the need for more foreign capital.

    And Greece’s real problem is not the debt because the debt is only the derivative of the underlying. The underlying is the low economic value generation capacity of the Greek economy. That has been Greece’s problem since independence. If memory serves well, Greece was on a fairly good track until it got the Euro. Since then, large numbers of productive companies, and even entire industries, disappeared.

    I would be very happy if one made a full stop with any discussions related to debt and focused all one’s attention on the question of how to increase Greee’s economic value generation capacity.

  6. Agree with kleingut on diagnosis of present crisis in Greece. It is a crisis of underproduction and not of oversupply. The original post misses that crucial distinction entirely.
    As for past performance, between 1932 and 1992, Greece had strict capital and foreign exchange controls that made sure that the allocation of capital was made entirely by the state. Very inefficiently and corruptingly, too, leading to very severe economic pain for the common people. During the "golden decades" of very rapid economic growth in Greece, 1,2 million people were forced to emigrate so as to intergrate into the world economy and escape the clutches of stifling economic and, also, political control over their lives by the, then, ruling classes.
    Capital and exchange controls were lifted between 1992 and 1994 in preperation for Economic and Monetary Union and Greece benefited from nearly a decade of rapid growth. Alas, most of it was due to a shift in investment away from tradeables and into non-tradeables, facilitated by falling interest rates as Eurozone entry beckoned. This malinvestment went on after Eurozone entry leading to huge balance of payments deficits. Those deficits, due to reduced capacity to produce are the real root of the crisis. But the euro only exacerbated an existing disease of the Greek economy. Moralising about baddy banks is no substitute for a correct diagnosis.

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