Greece, one of the world’s oldest countries, is on the brink of complete financial ruin.
For those who haven’t being paying attention, here’s a quick summary of the crisis: For years, Greece has struggled with large deficits and growing debt, threatening a bank run around the bond markets of Europe so big it could have wiped out core European banks. Because its bonds were held by big banks in France and Germany whose assets footprints and leverage ratios were twice that of their American cousins, a Greek default would have forced those banks to sell other similar assets to cover their losses. But with French and German banks invested in the European periphery to the tune of nearly a trillion Euros, such a volume of contracts hitting the market all at once would have blown up the European banking system.To stop this, the European authorities cobbled together a bailout for those banks in 2010, called the First Greek Program. Greece saw hardly any of the money. The banks were saved, but the Greek economy, already heavily indebted, took on more debt as a result. And thanks to overly tight fiscal policies applied as a part of the program, Greek GDP shrunk by a nearly a third and youth unemployment soared. To compensate for that shrinkage, Greece got another bailout in 2012, adding only more debt that the country couldn’t pay back.
Having grown tired of the promise that this bitter medicine would provide a recovery that never arrived, the Greek population elected a government that tried to make its creditors (the other governments of the eurozone) realize that shrinking the economy was making it harder, not easier, to pay back the debt. That attempt at persuasion failed utterly. The creditors wanted to be paid in full, and continued to press for more of the same austere policies, despite buckets of evidence that they weren’t working..
Fed up with Europe’s attitude but running out of other options, the Greek government asked the Greek people to vote on the latest thin gruel offer. The moment they did that, the creditors withdrew the offer. The Greeks voted on it anyway and said no.
At that point, the European Central Bank, nominally independent and yet a part of the creditors coalition charged with ensuring financial stability in Europe, decided to make sure that Greece would experience extreme financial instability by limiting liquidity to Greek banks (despite the fact that they are solvent) and by bungling up the Greek payments system. Oddly, those policies were calibrated to reach maximum pain just before the deadline for the latest deadline for Greece to come up with a new offer to their creditors.
With the banks collapsing, fear of civil unrest rising, and with fellow Eurozone members openly expressing their desire to kick the Greeks out, the government that had just won a referendum to reject more austerity, it seems, has just submitted a document that signs up for more of the same. Again.
Now, let’s assume that this new deal is approved by all the involved parties – and all before the Greek banking system implodes given the damage that the ECB’s actions have caused. Does this mean the crisis is over?
Sadly no. This is just another exercise in “extend and pretend.” The current agreement once again has Greece, the sixth oldest country in the world (San Marino doesn’t count), cutting pensions in the middle of a deep depression to help balance its budget – a policy that is counterproductive since it cuts consumption. It proposes raising taxes on the wealthy, which also doesn’t work since they can – and have – moved their wealth abroad. It also imagines this chronically shocked economy growing at 25% above its historic average, while running a budget surplus of 3.5% of GDP for the next 30 years, so it can hand over the proceeds to its creditors.
Given that the United States finds it hard to run a surplus, the chances of Greece doing this is pretty much zero. The economy will shrink further and what could have gone into investment to raise GDP will go back to the creditors. It’s reminiscent of Albert Einstein’s definition of insanity as doing the same thing over and over and expecting different results.
The perception that the Greek government is corrupt (even though they match Italy on corruption indexes, and yet we still invest in Italy) and lazy (even though they actually work 700 more hours annually than Germans), is beside the point. The proposed solution can’t work even if Greece were run by the austere Angela Merkel herself.
One version of what happens next is what happened to Germany after World War Two, when unconditional surrender was followed by the Marshall Plan and, once enough time had passed, debt forgiveness. One hopes that is the path we are on. But another vision is what happened to Germany after World War One: Unconditional surrender followed by a debt regime so punitive that Germany eventually defaulted to get real debt relief – the Versailles Treaty.
Time will tell which future – Marshall or Versailles – is in store for Greece. But one thing is certain: This agreement, if it passes, is not the end of the Greek drama by any means.
Mark Blyth is Eastman Professor of Political Economy at the Watson Institute for International Studies at Brown University.