Greeks have had enough. That was the message of last Sunday’s general election in which the old mainstream parties were kicked aside and the radical left-wing party, Syriza, won a landslide.
Its youthful leader, Alexis Tsipras, now Greece’s prime minister, is intent on putting an end to the severe austerity policies that have been imposed on the country over the last five years as a quid pro quo for bailouts to stop it going bankrupt. Central to his strategy is that some or all of Greece’s huge debts should be written off. But the country’s creditors, notably other European Union governments, are equally determined not to forgive the debts owed to them. So should Greece be freed from its debts or not?
After the global financial crisis broke in 2008, Greece suffered a worse economic catastrophe than any other European country. That’s because, before the crash, it had been living as though there were no tomorrow. Governments of both main parties had been unbelievably profligate in spending money they didn’t have as a means of oiling the wheels of an essentially corrupt political system. Taxpayers, meanwhile, had grown accustomed not to bother paying their taxes. The result was ballooning government debt which European banks were happy to fund, so confident was everyone at the time that things could only get better.
The crash put an end to all that and Greece was saved from bankruptcy only by being bailed out by the International Monetary Fund, the European Central Bank and its partners in the European Union with whom it shared a currency, the euro. Over the next few years the bailout totted up to a massive 245 billion euros.
But the cost of the bailout for the Greeks was severe. The disciplines imposed on the country in order to get it back on the rails led to a fall of 25% in the size of its economy. Unemployment rose from 12.5% in 2010 to 25.8% in 2014. Youth unemployment soared from 32.2% in 2010 to 57.5% in 2013. Public sector salaries fell by 23% in the four years after 2010 and the minimum wage was cut by 22%, and by 32% for the young. Joblessness, poverty and misery affected virtually parts of society.
The consequence of this severe austerity was that, finally, in 2014 the economy did start to grow again, albeit at a very sluggish rate of less than 1%. Furthermore, the government’s own deficit which was running at an astonishing 15.2% in 2009 had fallen to 1.8% in 2013. Indeed, if debt interest payments are excluded, it has been running a surplus for over a year now. But the overall national debt has soared and now stands at 175% of national income.
So it is hardly any surprise that Greek voters have rebelled, rallying to the call of the radical left leader, Alexis Tsipras, to throw out policies he described as ‘fiscal waterboarding’. Indeed the Financial Times has said that on existing policies, ‘to service its debt burden would require Greece to operate as a quasi slave economy’.
Instead, Mr Tsipras’s Syriza party ran on a programme of increasing public spending and cutting taxes. It wants to provide free food and electricity for the destitute poor, restore some of the income of civil servants, raise the minimum wage, axe a deeply unpopular property tax, tackle tax evasion among the rich and end the dominance of the wealthy oligarchs who had both the other main parties in their pockets. Most of all it wants to negotiate away the country’s debt, or as much as it can. Most is now owed to other EU governments.
Although Syriza did spectacularly well in the elections, it narrowly failed to win an overall majority in the Greek parliament. But instead of forming a coalition with a more moderate party of the centre it has gone into government with a party of the right with which it shares little in common except one thing. The ‘Independent Greeks’ party is as viscerally opposed to the burden of Greek debt and the austerity policies it has brought in its wake as Syriza. Its leader, Panos Kammenos, is outraged that Greece has, as he puts it, been ‘governed by email from Berlin’ in recent years.
The case for debt forgiveness put forward by the new Greek government is clear enough. It says the old policies have crucified the Greek economy and the Greek people and they cannot take any more. The election proves it. Furthermore, they say, relieving the Greek economy of much of its debt burden is the best way to revive it and rekindle decent rates of growth. And they point out that the lessons of history are on their side. It was the forgiveness of debt, which happened four times in the twentieth century, that helped Germany become the powerhouse it now is. If Germany was the beneficiary of having its debts cancelled, should it not now show enlightened generosity in forgiving the debts of those who owe it money?
But that is not how things are seen in Berlin. The German finance minister, Wolfgang Schauble, said after the Greek elections: ‘There are rules; there are agreements’. If he had used less diplomatic language, he would have simply said: ‘Nein!’.
The Germans and others have several reasons for refusing to do what Mr Tsipras and his colleagues are demanding. Firstly, they believe that only by keeping up the pressure on the Greeks will they continue to make the structural reforms necessary for the long-term strength of the Greek economy. The Germans note that once it looked as though Syriza was going to win, many Greeks simply stopped paying their taxes in anticipation of the new government lightening their load. That’s just what the Germans and others don’t want to happen.
Secondly, the Germans and other northern EU countries are worried about contagion among other southern EU countries. If the Greeks are let off the hook, they calculate, voters in countries such as Spain, Portugal and Italy will see it as an incentive to vote for their own versions of Syriza in order to ease their own austerity. Discipline within the eurozone would then evaporate.
The response to that among the electorates of the fiscally more responsible countries of northern Europe would be outrage. They would take it out on governments such as the German government, with the result that eurosceptic parties would sweep to power threatening the very future not only of the eurozone but of the EU itself.
In any case, say the German government and its allies, creditor governments have already been very generous to the Greeks. The bailouts have both extended the period over which Greece has to repay its debts and reduced the interest it pays in the meantime. Greece, they argue, has a much better deal than many other EU debtor nations.
It is for these reasons that the Finnish Prime Minister, Alex Stubb, said after Syriza’s victory: ‘We will not forgive loans but we are ready to discuss extending the bailout programme or maturities’.
All this means that very tough negotiations are in store. Both sides are giving every indication that they will refuse to budge. And there is urgency in the talks. Greece has only about ten billion euros available to pay upcoming debts, but that will take it only up to the summer. It will then be dependent on existing creditors, in the form of the EU, the ECB and the IMF, coming up with new money to roll over existing debts. If no agreement is made, the taps risk being turned off. Greece would then unilaterally default on its debts. It would very probably be forced out of the euro (which few Greeks want) and face years of further hardship before it could turn again to the ordinary financial markets to finance its spending. The effect of all this on the euro itself is impossible to predict.
So a great deal hangs on the outcome of the negotiations. These will boil down to the question of whether Greece is to be forgiven its debts or not. The Greek electorate is clearly demanding at least some forgiveness; the German electorate wants to forgive nothing.
Whose side are you on? And what do you think might be the best compromise that could be negotiated?
