[Marxism] A useful op-ed piece on Greek debt by Paul Krugman
lnp3 at panix.com
Fri Jan 30 08:49:49 MST 2015
NY Times Op-Ed, Jan. 30 2015
Europe’s Greek Test
by Paul Krugman
In the five years (!) that have passed since the euro crisis began,
clear thinking has been in notably short supply. But that fuzziness must
now end. Recent events in Greece pose a fundamental challenge for
Europe: Can it get past the myths and the moralizing, and deal with
reality in a way that respects the Continent’s core values? If not, the
whole European project — the attempt to build peace and democracy
through shared prosperity — will suffer a terrible, perhaps mortal blow.
First, about those myths: Many people seem to believe that the loans
Athens has received since the crisis broke have been subsidizing Greek
The truth, however, is that the great bulk of the money lent to Greece
has been used simply to pay interest and principal on debt. In fact, for
the past two years, more than all of the money going to Greece has been
recycled in this way: the Greek government is taking in more revenue
than it spends on things other than interest, and handing the extra
funds over to its creditors.
Or to oversimplify things a bit, you can think of European policy as
involving a bailout, not of Greece, but of creditor-country banks, with
the Greek government simply acting as the middleman — and with the Greek
public, which has seen a catastrophic fall in living standards, required
to make further sacrifices so that it, too, can contribute funds to that
One way to think about the demands of the newly elected Greek government
is that it wants a reduction in the size of that contribution. Nobody is
talking about Greece spending more than it takes in; all that might be
on the table would be spending less on interest and more on things like
health care and aid to the destitute. And doing so would have the side
effect of greatly reducing Greece’s 25 percent rate of unemployment.
But doesn’t Greece have an obligation to pay the debts its own
government chose to run up? That’s where the moralizing comes in.
It’s true that Greece (or more precisely the center-right government
that ruled the nation from 2004-9) voluntarily borrowed vast sums. It’s
also true, however, that banks in Germany and elsewhere voluntarily lent
Greece all that money. We would ordinarily expect both sides of that
misjudgment to pay a price. But the private lenders have been largely
bailed out (despite a “haircut” on their claims in 2012). Meanwhile,
Greece is expected to keep on paying.
Now, the truth is that nobody believes that Greece can fully repay. So
why not recognize that reality and reduce the payments to a level that
doesn’t impose endless suffering? Is the goal to make Greece an example
for other borrowers? If so, how is that consistent with the values of
what is supposed to be an association of sovereign, democratic nations?
The question of values becomes even starker once we consider why
Greece’s creditors still have power. If it were just a matter of
government finance, Greece could simply declare bankruptcy; it would be
cut off from new loans, but it would also stop paying off existing
debts, and its cash flow would actually improve.
The problem for Greece, however, is the fragility of its banks, which
currently (like banks throughout the euro area) have access to credit
from the European Central Bank. Cut off that credit, and the Greek
banking system would probably melt down amid huge bank runs. As long as
it stays on the euro, then, Greece needs the good will of the central
bank, which may, in turn, depend on the attitude of Germany and other
But think about how that plays into debt negotiations. Is Germany really
prepared, in effect, to say to a fellow European democracy, “Pay up or
we’ll destroy your banking system?”
And think about what happens if the new Greek government — which was,
after all, elected on a promise to end austerity — refuses to give in?
That way, all too easily, lies a forced exit of Greece from the euro,
with potentially disastrous economic and political consequences for
Europe as a whole.
Objectively, resolving this situation shouldn’t be hard. Although nobody
knows it, Greece has actually made great progress in regaining
competitiveness; wages and costs have fallen dramatically, so that, at
this point, austerity is the main thing holding the economy back. So
what’s needed is simple: Let Greece run smaller but still positive
surpluses, which would relieve Greek suffering, and let the new
government claim success, defusing the anti-democratic forces waiting in
the wings. Meanwhile, the cost to creditor-nation taxpayers — who were
never going to get the full value of the debt — would be minimal.
Doing the right thing would, however, require that other Europeans,
Germans in particular, abandon self-serving myths and stop substituting
moralizing for analysis.
Can they do it? We’ll soon see.
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