|Greece cheering its Referendum, July 15, 2015|
USA Today photo
Today Greece strongly rejected (61% "No" with 90% of votes counted) the deal last offered by the European Commission, the European Central Bank, and the IMF (the "Troika"). In doing so they have strongly backed Greek Prime Minister Alexis Tsirpas in his negotiations with Greece's creditors.
Three things seem clear: 1) Greece is in a financial pickle largely because of its own doing, and this mostly predates 2009; 2) the debt restructuring deal on offer was full of austerity, and unlikely to allow Greece to grow sufficiently to meet the onerous obligations imposed; and 3) the Northern Europeans don't like Tsirpas and his Syriza governing coalition.
In the United States we have a strong commitment to our bankruptcy laws. We allow people who are unable to repay their debts to default, save their shirt, and start over, debt free. We believe this is efficient for the economy as whole. We believe it is productive to minimize the stigma of bankruptcy despite the moral hazard of letting people who have mismanaged their finances off the hook. We believe strong bankruptcy protection is healthy for society as a whole.
The reasons for finding a realistic debt relief package for Greece are similar. Europe will not benefit by saddling Greece with a depressed economy, high unemployment, and no light at the end of the tunnel. Not only would this impose tremendous hardship on the youth of Greece--who had nothing to do with the financial abuses but will bear the brunt of the unemployment--but it risks political unrest. It will retard the growth of Europe as a whole.
In voting "No," Greeks have given their acknowledgement that they recognize and are willing to share the risks of the Tsirpas government holding out for a more sensible debt relief package. I say three cheers for the Greeks for involving the democratic process in a crucial national decision.
The Troika, and Europe as a whole, must now decide whether they want to find a solution, which will entail a reduction of austerity and substantial debt relief, or whether they want to jeopardize the European project. The fact that the Northern Europeans find Tsirpas personally distasteful surely must not be allowed to stand in the way.
They can't dilly dally. Time is short. Greece is almost out of money.
As we await what happens next, Brad DeLong sends us to an enlightening interview with Thomas Picketty (the French star economist who focused Western democracies on inequality with the publication last year of his Capital in the 21st Century). He was interviewed by the German publication Die Zeit on July 4, 2015.
Here are some highlights from the interview:
DIE ZEIT: Should we Germans be happy that even the French government is aligned with the German dogma of austerity?
Thomas Piketty: Absolutely not. This is neither a reason for France, nor Germany, and especially not for Europe, to be happy. I am much more afraid that the conservatives, especially in Germany, are about to destroy Europe and the European idea, all because of their shocking ignorance of history.
ZEIT: But we Germans have already reckoned with our own history.
Piketty: But not when it comes to repaying debts! Germany’s past, in this respect, should be of great significance to today’s Germans. Look at the history of national debt: Great Britain, Germany, and France were all once in the situation of today’s Greece, and in fact had been far more indebted. The first lesson that we can take from the history of government debt is that we are not facing a brand new problem. There have been many ways to repay debts, and not just one, which is what Berlin and Paris would have the Greeks believe.
ZEIT: But shouldn’t they repay their debts?
Piketty: My book recounts the history of income and wealth, including that of nations. What struck me while I was writing is that Germany is really the single best example of a country that, throughout its history, has never repaid its external debt. Neither after the First nor the Second World War. However, it has frequently made other nations pay up, such as after the Franco-Prussian War of 1870, when it demanded massive reparations from France and indeed received them. The French state suffered for decades under this debt. The history of public debt is full of irony. It rarely follows our ideas of order and justice. .... When I hear the Germans say that they maintain a very moral stance about debt and strongly believe that debts must be repaid, then I think: what a huge joke! Germany is the country that has never repaid its debts. It has no standing to lecture other nations.
After the war ended in 1945, Germany’s debt amounted to over 200% of its GDP. Ten years later, little of that remained: public debt was less than 20% of GDP. Around the same time, France managed a similarly artful turnaround. We never would have managed this unbelievably fast reduction in debt through the fiscal discipline that we today recommend to Greece. Instead, both of our states employed the second method with the three components that I managed, including debt relief. Think about the London Debt Agreement of 1953, where 60% of German foreign debt was cancelled and its internal debts were restructured. .... [I]t was a rational political and economic decision. They correctly recognized that, after large crises that created huge debt loads, at some point people need to look toward the future. We cannot demand that new generations must pay for decades for the mistakes of their parents. The Greeks have, without a doubt, made big mistakes. Until 2009, the government in Athens forged its books. But despite this, the younger generation of Greeks carries no more responsibility for the mistakes of its elders than the younger generation of Germans did in the 1950s and 1960s. We need to look ahead. Europe was founded on debt forgiveness and investment in the future. Not on the idea of endless penance. We need to remember this.
ZEIT: The German Minister of Finance, on the other hand, seems to believe that a Greek exit from the Eurozone could foster greater unity within Europe.
Piketty: If we start kicking states out, then the crisis of confidence in which the Eurozone finds itself today will only worsen. Financial markets will immediately turn on the next country. This would be the beginning of a long, drawn-out period of agony, in whose grasp we risk sacrificing Europe’s social model, its democracy, indeed its civilization on the altar of a conservative, irrational austerity policy.
ZEIT: Do you believe that we Germans aren’t generous enough?
Piketty: What are you talking about? Generous? Currently, Germany is profiting from Greece as it extends loans at comparatively high interest rates.
ZEIT: What solution would you suggest for this crisis?
Piketty: We need a conference on all of Europe’s debts, just like after World War II. A restrucutring of all debt, not just in Greece but in several European countries, is inevitable. Just now, we’ve lost six months in the completely intransparent negotiations with Athens. The Eurogroup’s notion that Greece will reach a budgetary surplus of 4% of GDP and will pay back its debts within 30 to 40 years is still on the table. Allegedly, they will reach one percent surplus in 2015, then two percent in 2016, and three and a half percent in 2017. Completely ridiculous! This will never happen. Yet we keep postponing the necessary debate until the cows come home.
ZEIT: And what would happen after the major debt cuts?
Piketty: A new European institution would be required to determine the maximum allowable budget deficit in order to prevent the regrowth of debt. For example, this could be a commmittee in the European Parliament consisting of legislators from national parliaments. Budgetary decisions should not be off-limits to legislatures. To undermine European democracy, which is what Germany is doing today by insisting that states remain in penury under mechanisms that Berlin itself is muscling through, is a grievous mistake.Read the whole thing here.
This is no time for false pride and wounded egos. I hope Europe's leaders and the IMF respond in a positive and productive manner to this referendum.