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Mark Blyth spends a large part of his recent article, “A Pain in the Athens: Why Greece Isn’t to Blame for the Crisis,” pointing out that much of Europe’s bailout money for Greece has been used to pay back loans made by European banks. He concludes with a quote from former Bundesbank Chief Karl Otto Pöhl that the Greek bailout “was about protecting the German banks, but especially the French banks, from debt write-offs.” From this observation, which is substantially correct, Blyth goes on to draw conclusions that aren’t.
Blyth is absolutely right that the “bailouts-on-the-quiet,” in which Greece was “a mere conduit,” were a complete disgrace. But they weren’t a disgrace committed on the Greeks, nor did they increase Greece’s debt burden. They were a disgrace committed on the taxpayers in the countries providing the bailouts, who, as Blyth and many others have pointed out, will be “stuck with the bill” once the inevitable write-off occurs. But that doesn’t make Greece blameless for the original debt and the crisis it has generated. The country racked up huge debts; if it didn’t now owe money to the troika, it would certainly owe it to someone else and its economic problems would remain.
Blyth is equally wrong when he claims that the troika creditors are responsible for the austerity in Greece. Blyth gives figures for the amount of bailout money that actually “went toward keeping the Greek state running.” Others have offered their own assessments. According to Stanford’s Jeremy Bulow and Harvard’s Kenneth Rogoff, over 80 billion euros ($87 billion) in net new loans and aid were provided to Greece from 2010 to 2013, roughly equal to ten percent of its GDP. Although you can argue about the amount, what is clear in any case is that the net flow of money to Greece has been positive, which means that whatever economic pain the Greeks have endured from austerity, it would have been worse without the help of the EU and the International Monetary Fund.
The advocates of non-austerity policies in Greece never answer one question: Where is the money supposed to come from? There are only three possibilities, since debt write-offs would have never provided the new money needed to fund non-austerity policies. In theory, Greece could have borrowed it from the private sector, but private funding would have never been provided to a bankrupt Greek state pursuing expansionary policies. The second option is getting money from official sources, as has been done so far, but obviously not in the amounts Blyth would want; the eurozone was explicitly never set up for the type of massive wealth transfers this would have required, not only to the Greeks but also to the other struggling countries, which would have insisted on the same benefits. The third option would have been for the Greeks to leave the eurozone and print the money. But even Syriza has not advocated this option; it has cynically pledged to both keep the common currency and pursue an expansionary fiscal policy, on the unspoken and totally unrealistic premise of using Germany’s credit card.
The fundamental “deal” to be made is debt forgiveness in return for reform of the famously corrupt and inefficient Greek economy and government.It is also untrue to claim that the troika has ignored the need for a new deal with Greece. It has been clear all along that a substantial amount of Greek debt will have to be written off—the iron law of “what cannot be paid, will not be” still applies. The EU has repeatedly said (most recently in its press conference on July 7) that a debt write-off will be on the table in subsequent discussions. In fact, de facto write-offs have already occurred throughout the bailout, as the creditors have successively relaxed the interest and maturity terms of the debt. The only dispute with a further write-off is who goes first.
The fundamental “deal” to be made is debt forgiveness in return for reform of the famously corrupt and inefficient Greek economy and government. Since Greek politicians and their various constituents have fought these reforms tooth and nail, frequently defaulting on earlier commitments (such as the obligation to privatize companies that have long been used to provide “jobs for the boys”), and since the Greek public has brought to power a party that is sworn to oppose these reforms, can anyone really blame the rest of the eurozone for asking Greece to move first? In that, the Greeks have only themselves to blame.
As for the European Central Bank’s supposed failures to live up to its role as an “independent central bank” and instead its becoming “the eurogroup’s enforcer,” Blyth cites an article by Martin Sandbu in the Financial Times that claims that “strangling Greek banks is legally and economically unjustified.” The legal case is, to put it very mildly, far from compelling, but it is still stronger than the economic one. Sandbu invokes “Bagehot’s dictum” that in times of financial crisis, central banks should lend freely to solvent financial institutions only against good collateral and at punitive interest rates. The situation in Greece fails all three prongs of this test, particularly when Greece is flirting with a euro exit, to be followed by a huge devaluation of the new drachma and all the assets denominated in it.
Far from being an enforcer, if anything, the ECB has been far too lenient, allowing huge direct and indirect exposures to build up, largely outside of the review of the European citizenry or their parliaments. If Greece leaves the eurozone, these exposures will almost certainly generate losses for the taxpayers of the remaining countries. The article keeps a running tally on the score between democracy and austerity, but like Syriza, it seems to think that only Greek voters should count. Further, criticizing the ECB because it failed to provide funding in an emergency precipitated by the Greeks themselves shows a strange sort of moral reasoning.
The simple reality in this family drama is this: The Greeks had a party, not for the first time in their history, for which they do not want to, and cannot, pay. The rest of the eurozone has been reluctantly willing to forgive much of the Greeks’ former excess and provide limited assistance to keep them in the family (which they lied to join), but only if they make credible commitments to change; this formula has worked decently well with the other struggling eurozone countries and is reasonably consistent with the rules of the zone and political realities. By fighting reform, electing Syriza, and then giving a resounding “oxi” in the referendum, the Greeks have announced loud and clear that they are an old dog with no intention of learning new tricks. In such a situation, as the MIT economist Eric Beinhocker has recently pointed out, it is better for all parties if they simply acknowledge that the relationship isn’t working and look for a separation that is as painless as possible. The recent capitulation by the Greeks, assuming it passes its various legislative hurdles, does not change this mutually abusive relationship. The crisis will continue.