With Greece under Syriza about to enter negotiations with the Troika, there has been much discussion of what might happen, and what should happen. This post is in the ‘should’ category. In the past I have argued that the Troika should welcome the opportunity to put right earlier mistakes. There should be a large amount of guilt, or at least regret, on their side. I will say why in a minute, but just to show that I’m not living in a dreamland, read this FT piece by Reza Moghadam, the former head of the European Division of the IMF.
In reality debt restructuring is a bargaining game, but I want to suggest a general principle that any agreement should hold to. That principle is that there should be no significant increase in unemployment above its natural rate (let’s call this excess unemployment) as a direct result of having to pay interest on any government debt. Unemployment above the natural rate when there is no excess core inflation is a waste of resources as well as being damaging to most of those unemployed, so any deal that creates such unemployment, or allows it to persist, should be regarded as the result of creditors acting against the social good. Indeed you could easily argue that it involves creditors acting against their own self-interest, because the more of an economy’s resources you waste, the less is available to pay its debts.
This is why the Troika should feel guilty, because by not allowing Greece to default on all its debt back in 2010 it helped create a situation where over half young people in Greece are unemployed. Some excess unemployment was inevitable in Greece after 2010 because the country had become very uncompetitive, and the impact of this on demand had been offset by large primary budget deficits. (This problem was made worse by pre-recession cost-cutting in Germany.) However, as I have argued in the past in the context of Latvia, the efficient way to restore competitiveness is to have small but persistent excess unemployment: a ‘short sharp shock’ is much more costly. The Troika imposed much too much austerity on Greece in a futile effort to avoid full and early default.
The process transferred the ownership of the remaining Greek government debt from the private sector to the public sector - other Eurozone governments and the IMF. The transfer to other European governments was wrong in two respects. First, it was another example of governments bailing out their own banks and other financial institutions with no costs to those institutions. Second, it made any subsequent restructuring of Greek debt much more difficult politically. If there had been full and immediate default there would have still been need for additional lending to Greece to give them time to adjust their public finances and avoid a large increase in unemployment, but that is what the IMF is for. If the Troika had not been involved, the IMF may well have gone for early and complete default.
So much for the past and guilt. What about what should happen now. The priority is for Greece to reduce unemployment as quickly as possible. That would be consistent with my principle, and so should be a priority for both sides. It could be achieved, for example, by suspending all interest payments on all Greek debt immediately, with those payments resuming on any debt not written off once excess unemployment had been eliminated. Paul Krugman shows what a positive effect no longer having to run a primary surplus to pay interest could have on the Greek economy. (As Paul Krugman observes in a separate post, and OECD data confirm, the competitive position of Greece is now back to the level it was when the Euro was created.)
What about all the ‘structural reform’ that the Troika has imposed. The new Greek government is likely to introduce plenty of structural reform of its own, so encouragement from outside is hardly necessary. If it is not the structural reform that the Troika prefers, then I’m afraid that is the price you pay for having a democratic Europe. We know that some within the Eurozone bureaucracy have little respect for national sovereignty, and it is time these people were put in their place.
What about the backlash from voters in Northern Europe? I find arguments that say this should be (we are talking about what should happen here) a barrier to debt restructuring hard to take seriously. Northern Europe’s politicians foolishly socialised the Greek debt held by their own country’s financial institutions. To say Greece has to pay the price of this mistake seems perverse. What about other periphery countries wanting to revise the terms they were required to accept for Troika help? Well maybe they are right to do so. And finally what about the argument that this would ‘frighten the markets’ (always a good tell by the side that uses it that their argument is weak)? The markets will be unsettled far more if negotiations break down because creditors refuse to give enough.
Germany is now the third most popular country of origin for pageviews of my blog, which is something I’m very happy about. I’m sure at least some of those readers will be worrying that any renegotiation violates ‘the law’, or at least contracts that have been previously agreed. I have very little sympathy with that argument. The British government was also protecting the rule of law when it provided armed guards to ensure that shipments of grain left Ireland during the famine of the 1840s.
Even if you do not accept my argument about the role that creditors played in inflicting great harm on the Greek economy and people in the past, these creditors have a clear choice for the future. Current levels of unemployment in Greece represent a criminal waste of resources and source of unhappiness, and it should be brought to an end as soon as possible. Creditors can make this happen with a small economic cost to themselves by at least suspending all interest payments until the Greek economy has recovered. It is a cost that creditors are almost certainly going to have to pay at some point anyway. As Martin Wolf says in an excellent column, “What cannot be paid will not be paid.” It would be much better for the Greek people and Europe as a whole for the Troika to admit this now rather than later.