“The repayment of foreign loans and the return to stable currencies were recognized as the touchstones of rationality in politics; and no private suffering, no infringement of sovereignty was considered too great a sacrifice for the recovery of monetary integrity. The privations of the unemployed made jobless by deflation; the destitution of public servants dismissed without a pittance; even the relinquishment of national rights and the loss of constitutional liberties were judged a fair price to pay for the fulfilment of the requirements of sound budgets and sound currencies, these a priori of economic liberalism.”
Karl Polanyi (1944), “The Great Transformation” (p142)
This quote (HT Jeremy Smith) could almost be written today about Greece. I had once thought that the lessons of the interwar period and Great Depression had been well learnt, but 2010 austerity showed that was wrong. I therefore used in a 2014 post an earlier example of where one country allowed another to suffer for what was thought to be sound economics and their own ultimate good (‘a sharp but effectual remedy’): the British treatment of Ireland during the famine.
The British held back relief because of a combination of laissez-faire beliefs and prejudice against Irish catholics. Replace famine relief with debt relief and Irish operating an inefficient agricultural system with lazy Greeks and an economy in need of structural reform, and the two stories have strong similarities, although of course the scale of the suffering is different.
To understand why the Greek crisis goes on you need to understand its history. That the Greek government borrowed too much is generally agreed. What is often ignored is that the scale of the excess borrowing meant default was pretty inevitable. But Eurozone leaders, worried about their banking system (which held a lot of Greek debt), first postponed default and then made it partial. The real ‘bailing out’ was for the European banks and others who had lent to the Greek government. The money the Eurozone lent to Greece largely went to pay off Greece’s creditors.
There was absolutely nothing that obliged Eurozone leaders to lend their voters money to bail out these creditors. Pretty well all the analysis I saw at the time suggested it would be money that Greece would be unable to pay back. If European leaders felt their banking systems needed support, they could have done this directly. But instead they convinced themselves that Greece could pay them back. It was a mistake they will do anything to avoid admitting.
To try and ensure they got their money back, they along with the IMF effectively took over the running of the Greek economy. The result has been a complete disaster. The amount of austerity imposed caused great hardship, and crashed the economy. Whereas the Irish and Spanish economies are beginning to recover and regain market access, Greece is miles away from that, and the Troika’s structural reforms are partly to blame.
Austerity did achieve primary balance on the government’s accounts, which means that the government only needed to borrow to rollover existing debt. But the Troika wants 3.5% primary surpluses by 2018: they want to start getting their money back sooner rather than later. This was and is an absurd demand, and is quite likely to mean that the Troika gets less of their money back in the end. It is clearly preferable to allow the Greek economy to first recover, and then work out over what period debts could be repaid. Right now Greece needs more aggregate demand not structural reform, yet the Troika insists on taking more demand out of the economy.
The requests that the Syriza government made in 2015 were eminently reasonable, as my joint letter with Flassbeck, Piketty, Sachs and Rodrick explained. It was defeated by an exercise of raw political power: Germany and the ECB were prepared to expel Greece from the Eurozone. The Greek people were not going to be allowed to escape from the debtors prison of Troika rule. Greece is even excluded from the debt relief implied by the ECB’s quantitative easing.
Despite Martin Sandbu’s optimism, the recent deal is essentially more of the same. The IMF, which knows it makes no sense to ‘extend and pretend’, has again capitulated. The reaction to the IMF’s paper on neoliberalism has generally missed the key point. It is not fanciful to believe that the paper is directed at those within the IMF like Poul Thomsen, the head of their European department. Falling GDP will continue to be blamed on the Greek government, even without its former finance minister. Of course one day the Greek economy will recover, just as the Irish famine came to an end. But history, as taught in Britain as well as Ireland, does not remember the British troops guarding the shipments of grain leaving Ireland during the famine as heroic upholders of the rules of law and contract. Nor will it do the same for the members of the Troika that keep Greece in poverty.