Tsipras vs. Merkel on Greek debt: Unstoppable mandate faces immovable stance?(Read article summary)
Greece's economic pain propelled its new left-wing prime minister to power, and early signs are he'll push Angela Merkel and the rest of Europe hard on debt forgiveness and a curtailment of the country's austerity program.
Three numbers: 177, 23, and 26.
Those are, in order, Greece's external debt as a percentage of gross domestic product (177), the decline in GDP since a bailout agreement was reached with the IMF and the European Central Bank in 2010 (23 percent), and the current unemployment rate (26 percent, with youth unemployment around 50 percent.)
The economic malaise, comparable in pain to the US Great Depression that led, ultimately, to Roosevelt's New Deal and the use of stimulus spending to pull the nation out of crisis, is a consequence of too much borrowing by Greece – and lending by foreign financial institutions – when times were better.
But many Greeks have grown convinced that the medicine of austerity imposed on them by the EU, led by German Chancellor Angela Merkel, was adding to and prolonging the agony.
And for what? To avoid encouraging large, troubled economies like Spain and Italy to seek debt forgiveness of their own, perhaps posing a real threat to the euro? Why would Greek voters worry about that? The answer, resoundingly delivered over the weekend, is that they weren't.
Ms. Merkel and the IMF are now worried that Mr. Tsipras will demand huge cuts in Greece's external debt – so-called haircuts – and a release from the shackles of austerity imposed as part of the 2010 bailout. He and the Greek people who voted for him have plenty of ammunition that the deal hasn't done them much good, perhaps most importantly an IMF review of its efforts in Greece in June of 2013 that found its advice and projections had:
Underestimated the depth of the Greek economic downturn, underestimated the harm to Greek income and employment that would be caused by slashing spending, and overestimated the likelihood that "investor confidence" would return in response to all this and spread its magic pixie dust over the Greek people.
"On the positive side, moving ahead with the Greek program gave the euro area time to build a firewall to protect other vulnerable members and averted potentially severe effects on the global economy," the Fund wrote. "However, not tackling the public debt problem decisively at the outset or early in the program created uncertainty about the euro area’s capacity to resolve the crisis and likely aggravated the contraction in output. An upfront debt restructuring would have been better for Greece although this was not acceptable to the euro partners."
As I wrote at the time, it appeared the IMF and its partners seemed to believe, judging by the public statements, "that the Greek people, as their economy tanked and employment sank, would rally around policies likely to lead to further short-term unemployment." Their hopes were disappointed.
Nobel-prize-winning economist Paul Krugman was withering about this in a column today. "Supposedly hardheaded officials were in reality engaged in fantasy economics. Both the European Commission and the European Central Bank decided to believe in the confidence fairy – that is, to claim that the direct job-destroying effects of spending cuts would be more than made up for by a surge in private-sector optimism. The IMF was more cautious, but it nonetheless grossly underestimated the damage austerity would do."
Now Tsipras is getting to work on delivering on his anti-austerity campaign promises. He's vowed to expand the budget and extract concessions from Greece's creditors, and appointed a cabinet today that seems in tune with his thinking. He named Yanis Varoufakis, an economist who left his post at the University of Texas to run for parliament, as his finance minister. Mr. Varoufakis has been on an anti-austerity crusade for years on his blog.
Yesterday he hailed the coalition's election victory as a "splendid celebration of democracy, to put an end to a self-reinforcing crisis that produces indignity in Greece and feeds Europe’s darkest forces," in a nod to the rise of far-right groups that have gained prominence amid the recent economic strain. "Fresh from receiving our democratic mandate, we call upon the people of Europe and, indeed, the world over, to join us in a realm of shared, sustainable prosperity."
He told the BBC that Greece has had "fiscal waterboarding policies" imposed upon it and the new government wants to "bind our repayments to our growth." As to Merkel's complaints that German voters will be unwilling to pay more for Greece, he said he'd tell them that most of the bailout money has gone to external creditors, essentially wasted by being tossed into "a black hole of debt."
Jeffrey Sachs, the Columbia University economist and critic of austerity measures, quoted John Maynard Keynes in a column ahead of Mr. Tsipras' election. He first brought up Keynes' warning in The Economic Consequences of the Peace, written after he attended the 1919 Paris Peace Conference that concluded WWI, which among other things laid a heavy burden in debt and reparations on Germany. Keynes wrote:
Will the discontented peoples of Europe be willing for a generation to come so to order their lives that an appreciable part of their daily produce may be available to meet a foreign payment, the reason of which ... does not spring compellingly from their sense of justice or duty?
On the one hand, Europe must depend in the long run on her own daily labor and not on the largesse of America; but, on the other hand, she will not pinch herself in order that the fruit of her daily labor may go elsewhere. In short, I do not believe that any of these tributes will continue to be paid, at the best, for more than a very few years. They do not square with human nature or agree with the spirit of the age.
Keynes' judgement then was right. Germany both foundered economically as it struggled to tap credit markets, and had paid only a fraction of the compensation demanded by the time war returned to Europe 20 years later. After WWII, a different approach was tried, with the US-backed Marshall Plan providing economic stimulus and the 1953 London conference slashing Germany's national debt in half. Sachs writes:
"Some Germans today insist that a debt is a debt, and that Greece must repay in full... Did Germany 'deserve' the relief in 1953? That was not the right question. Germany’s new democracy needed the relief, and Germany needed a fresh start. It played a major role in the economic recovery and construction of Germany’s democratic institutions."
To put it in the words of Snoop from the US television show The Wire: "Deserve's got nothing to do with it."
What comes next? Hard to say who will give up in this high-stakes game of chicken, before either a unilateral Greek default or concessions from Germany and other European powers that they insist they will not make.