Tuesday, July 07, 2015

The Economic Consequences of Greece

It may be a cliche to say this, but common sense was increasingly uncommon. As Thomas Piketty maintained, the current approach to Greek debt is driven by astonishing ignorance of history (see here). The fact that Germany has actually never paid its debt - not after the First World War (when it started another war not to pay) and after the Second (when rest of the world saw sense in not imposing austerity) - is important, despite the claims that German debt was different (see here).

History is indeed the big elephant in the room. However, for many people, the question of debt is a moral one. But this, the moral question, is less straight-forward than it appears. Historian and TV Presenter Simon Schama, after the Greek vote, went on Twitter to say that he might as well vote not to repay his Credit Card debt and ask the banks to restructure it. Even allowing for British humour, this is a surprisingly ill-informed view. A country is not a person, even though Margaret Thatcher and her successors may have taught the Anglo-Saxon world to think in those terms. Often, this is not about voting about your own credit card debt, but your uncle's! The moral question is even more convoluted when your grandfather forgave debts of the same person, who is now hounding you to pay your father's dues. (No wonder 85% of the 18-24 year olds voted No in the Greek Referendum, but 45% of those over 65)

Morality is also complicated when one considers how to pay a debt. A country often pays its debt differently than a person, because it can print its own money and make people work for it. Any usual country will have several tools, inflation, adjustment of exchange rates etc, to pay off its debt, the options the Greeks do not have. They do not have it because they are in the Euro, a commitment they are not wanting to abrogate. European Central Bank, in turn, has an obligation to the Greek banks, to make sure that they can meet their payment obligations, which it is quite eager to get out of.

But, morality is not simply one of obligations, but also what brings the best outcome (this may not be the German view, but certainly Anglo-Saxon). The Germans made the French pay for its 1871 war, and the French, in turn, insisted on huge German reparations after the First World War. In contrast, the Debt Conference after the Second World War, where Greece participated as a Creditor, forgave Germany's debt as it was unsustainable - and because, it was for the best possible outcome. Germany was vanquished, without option, a land left destroyed - and it needed to move forward. Greece is indeed not quite in as bad a position, but it still needs to move forward. There is no morality in trying to destroy the future of entire generations, for history's sake or otherwise.

It may be easy for German technocrats of this generation to let Greece go from the Euro, but they are being both oblivious of the past and ignorant of the future. History may not play out exactly the same again, but one may soon have a Greece outside Europe and Nato, permanently embittered and propped up by Russia or China. This may effectively mean the European project has failed, and next time, when Spain comes under pressure, the markets assume that the Europeans would not stand by them. Forgiving the Greek debt does not mean encouraging others to behave badly (quite the opposite - not helping Lehman Brothers meant bigger bank bailouts later), but demonstrating the resilience of the European project. 

Finally, imagine the future! A debt conference, not just for Greece but for all European countries, leading to greater financial discipline and investment in the future (as Piketty and others have suggested), would finally let Europe transcend the recession and move forward. Greece is at Ground Zero, which is where one is if the GDP shrinks by 25% even when the cities are not bombed, and it would have this enormous potential to flower again, creatively, socially, economically! It did happen in Greece, when Solon's reforms let the Greeks out of debt burdens and slavery (593 BC) - a debt relief started the whole European civilisation in a way! It is time to prove that this has not failed altogether.



 

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