James Duncan Davidson, my colleague from 6Wunderkinder Microsoft, recently wrote an insightful piece reflecting on the Impossible Greek Choices, an event that coincided with his wedding and honeymoon. (Congratulations to the newlyweds!). His writing, which I highly encourage you to read, beautifully captures his experiences and the people who have touched his life. While some have requested a German perspective, which by nature will lack the same personal touch, I hope to offer valuable context.
The Greek Referendum: A Misleading Question
The Greek Referendum was unusual: it asked voters to decide on an offer from the 18 other Eurozone countries and the IMF, an offer that was no longer on the table. This made the situation strange, as there wasn’t a real choice. From an outside perspective, it appeared to be a political tactic rather than a genuine decision-making moment.
It seemed that the Greek government presented the options as either submitting to “German control” or asserting independence. Furthermore, they framed the capital controls (implemented due to the banks’ insolvency) as “terrorism” from the EU. This perspective seemed absurd considering the EU’s financial support was essential for Greece’s survival. The EU even provided emergency funds. Labeling an entity providing financial aid as “terrorists” seems illogical.
Adding to the peculiarity, Greek Prime Minister Alexis Tsiprias believed a “No” vote would strengthen his hand in future negotiations, allowing him to secure a more favorable deal. This might go down as a major political miscalculation, but only time will tell if his gamble pays off.
A German Perspective: Living Within One’s Means
The German view on the Greek debt crisis is straightforward: living beyond one’s means indefinitely is unsustainable. While debt allows for temporary exceeding of one’s resources, eventual repayment is inevitable. This necessitates not only a return to the initial means but living below them to address the accumulated debt.
This principle seems obvious and uncontroversial, based on fundamental mathematics. However, this viewpoint might be influenced by my German background.
This doesn’t mean debt is inherently bad. It can be useful for managing the timing of resource availability, making investments to enhance earning potential, or addressing significant one-time expenses. However, debt shouldn’t be used to artificially inflate one’s standard of living. Such a strategy is inherently unsustainable.
The Keynesian Approach: Government Debt in Times of Crisis
Keynesian economics differentiates governments from individuals, suggesting that government debt isn’t equivalent to household debt. They emphasize the role of government debt during recessions, arguing that governments should increase borrowing to minimize economic contraction and stimulate growth. They believe that austerity measures during recessions are counterproductive, leading to further economic contraction and exacerbating the debt problem. This is because government debt is often measured relative to GDP, a key indicator of a country’s ability to repay.
While not entirely uncontroversial, these arguments seem largely valid.
Though often portrayed as contradictory, these perspectives might not be mutually exclusive. Krugman, for instance, criticizes “Austerians” by highlighting the accuracy of Keynesian predictions. However, Keynes advocated for debt repayment when the economy recovers, promoting counter-cyclical government spending.
This approach, however, requires discipline. When things are good, there’s little incentive to make difficult choices. Unfortunately, governments rarely prioritize debt repayment, perhaps due to a desire for voter approval or the need for “safe” government debt in pension systems. Additionally, financial markets seem to tolerate small, ongoing fiscal deficits.
Personally, I find this deeply concerning as it undermines democratic principles by prioritizing short-term gains over the long-term well-being of citizens. This approach feels akin to the Roman practice of “bread and circuses.”
Evading Consequences: Shifting the Burden
Of course, there is a way to live beyond your means without facing the consequences: have someone else foot the bill. For countries, this can take the form of defaulting on debt. Additionally, if the debt is in the country’s currency, options like devaluation (reducing the debt’s value) or high inflation (achieving a similar outcome gradually) exist.
Historically, countries like Italy and Greece frequently employed these tactics. However, this behavior makes lenders wary, leading to higher interest rates that account for inflation, devaluation risks, and potential default. In extreme cases, lending might cease altogether.
Joining the Eurozone meant losing control over currency and monetary policy, making inflation or devaluation unviable solutions. This is why meeting “convergence criteria” related to inflation and public debt was a prerequisite for joining.
While Italy made genuine efforts to meet these criteria, Greece did not. Even their official figures, which were questionable at best, were manipulated with the help of the US investment bank Goldman Sachs.
Unaware of this manipulation, private lenders provided loans to Greece at significantly lower Eurozone rates. This influx of easily accessible funds fueled a debt-driven spending spree in Greece, resulting in a remarkable GDP surge from 2001 (Euro adoption) to 2008 (the financial crisis).
However, this growth wasn’t fueled by increased competitiveness, exports, or tourism. Instead, it was primarily driven by cheap debt. While the Eurozone generally prospered during this period, Germany’s 2008 GDP was only 50% higher than its mid-1990s peak, illustrating the unsustainable nature of Greece’s growth.
During this time, Greece’s reliance on public debt piled, exceeding 10% of the budget.
The Greek Crisis: A Crisis of Trust
The financial crisis exposed the fragility of the global financial system. However, despite having debt levels comparable to other nations, Greece was hit exceptionally hard. This disparity stemmed from Greece’s deteriorating creditworthiness. Debt requires constant refinancing, and a poor credit rating transforms manageable debt into an unsustainable burden - a self-fulfilling prophecy.
Adding fuel to the fire, Goldman Sachs, the same bank that helped Greece manipulate its financial records, publicly questioned the country’s financial health. This revelation shattered Greece’s credibility, causing borrowing costs to skyrocket back to pre-Euro levels. The low Eurozone interest rates, justified by fabricated compliance with “convergence criteria,” were no longer accessible.
Without these manipulations, Greece would have faced higher borrowing costs, limiting their debt intake and preventing the unsustainable GDP bubble. The inability to manipulate their currency further compounded their problems. The core issue was trust – or the lack thereof. Lenders questioned the Greek government’s willingness to repay its debts in full. A lack of trust leads to higher interest rates, ultimately resulting in a scenario where borrowing becomes impossible.
Historically, Greece has struggled with trustworthiness, a fact acknowledged by all but ignored during the period between 2001 and 2008. This situation persisted because lenders failed to exercise due diligence, a reckless oversight compounded by Goldman Sachs’s deliberate deception.
Ideally, Greece should have defaulted on its unsustainable debt. The banks, guilty of reckless lending practices, should have borne the consequences of their actions and subsequently sued Goldman Sachs and the Greek government for damages.
Instead, the situation unfolded according to a familiar and disheartening pattern: privatized profits and socialized losses.
The economically sound Keynesian approach would have involved supporting Greece’s economic recovery, potentially through additional debt. However, this debt, issued against a backdrop of economic growth outpacing debt accumulation, would have been sustainable, leading to a reduction in the crucial debt-to-GDP ratio.
Instead, we find ourselves in the current predicament, with Greece’s GDP down 25% from its peak, albeit still notably higher than pre-Euro levels. The primary reason for this situation is a lack of trust in the Greek government’s ability to implement necessary reforms. This skepticism stems from a long history of Greek governments flouting EU regulations, breaking agreements, and disregarding rules.
Despite receiving billions in EU funds conditional on compliance, successive Greek governments, unlike their counterparts in other EU nations, have consistently circumvented regulations for over three decades.
For instance, the Common Agricultural Policy (CAP), a system of farm subsidies, mandates specific electronic reporting systems for receiving funds. While newer, often less wealthy EU members successfully implemented these systems (facing funding cuts for non-compliance), Greece has yet to do so.
The infamous case of plastic olive trees used to fraudulently obtain subsidies highlights the systemic issues within Greece. Robust control mechanisms would make such schemes significantly more challenging.
Beyond agricultural policies, Greece also falls short in areas like good governance and tax collection. For example, the country lacks a comprehensive land registry, a fundamental requirement for property tax collection and property rights protection.
Despite being mandated to establish a land registry and receiving substantial EU funds (€100 million) for this purpose, Greece failed to follow through. When questioned about the progress, Greek authorities initially feigned ignorance, only to offer a partial “refund” once confronted with evidence of their inaction. Such blatant disregard for commitments is astounding.
The lack of a land registry exacerbates Greece’s tax collection challenges, particularly concerning real estate. Wealthy individuals and their assets often escape taxation due to this lack of transparency. A land registry, understandably, is not favored by the elites as it would expose their assets and income to scrutiny.
One solution, proposed by Volker Pispers’s, involves addressing tax evasion by demolishing properties whose owners cannot be identified. This radical approach, while extreme, would likely lead to a significant increase in tax compliance.
Greek governments seem to view circumventing EU rules as their prerogative, an attitude never challenged until recently. Their indignation at being held accountable is understandable, as they perceive the enforcement of rules as an unprecedented and unjust punishment.
While EU institutions deserve some blame for allowing these transgressions to persist for so long, the lion’s share of responsibility rests with Greek politicians.
When Syriza came to power, there was hope for positive change. However, their actions, such as appointing relatives to well-paid positions and proposing vague plans to tax the wealthy while burdening lower-income groups, have been disappointing. This strategy of using citizens as shields to protect the affluent is, to reiterate, sickening.
A Path Forward: Fiscal Union or Enforced Discipline
Duncan writes:
What should be on the table is a decision by Europe to strengthen the economic union by sharing the eurozone’s debt. While the particulars of the Greek situation sent them over the edge first in the financial meltdown of 2008, sharing a currency between states without sharing debt is unsustainable in the long term for the entire eurozone. This isn’t news.
Confirming with Duncan, he clarified his support for a combined “debt and fiscal” union. It’s the only viable long-term solution for a monetary union, a point raised by many. He adds:
The only surprising thing at this point is that states like Germany insist on keeping Greece under the weight of a debt that can’t ever be repaid.
I disagree with this statement for several reasons:
- Greece willingly took on loans (from private banks) knowing they were unsustainable.
- Greece chose to falsify information to secure loans that would have been otherwise inaccessible.
- Greece opted for a bailout using public funds (taxpayer money), which came with conditions, instead of a potentially less desirable default. Accepting a bailout entails accepting the accompanying terms.
However, I don’t think anyone within the remaining Eurozone governments believes that Greece can completely avoid defaulting on at least a portion of its debt. These governments have already negotiated a partial default, impacting both public and private lenders.
Understandably, these governments want to prevent a similar situation from recurring. The most effective solution would be a fiscal union, requiring member states to relinquish some control over their spending. However, national governments, particularly the Greek government with its referendum and appeals to “national pride,” strongly oppose this idea.
Without a fiscal union, the only alternative is strict reforms. Given the Greek government’s track record of untrustworthiness, achieving these reforms requires external pressure. While economically unwise, there seems to be no other way to prevent Greece from continuing its unsustainable spending habits while expecting others to bear the costs. Such an arrangement is not viable.
In conclusion, the situation is complex. The current circumstances are challenging, especially for those impacted by their governments’ actions.
The Euro: A Catalyst for Political Union?
Returning to the Euro, I’ve always believed that the project wasn’t solely about monetary union. The visionaries behind it, myself included, aspired for a political union. Recognizing that immediate political unification was improbable, they strategically pursued monetary union. They understood that it would eventually necessitate political union as the only logical course of action - a classic Seldon crisis.
The perplexing aspect is that despite the crisis, the opportunity to establish the much-needed fiscal and political union is being squandered. There were plans, but they were disregarded. Are our current leaders paralyzed by fear or complacent? Do they lack the boldness to seize this opportunity and create something extraordinary? Perhaps the crisis hasn’t reached its peak yet. I’m genuinely unsure and utterly baffled.
Adding another layer to this already complex situation, the Euro was a prerequisite for German reunification, insisted upon by European “partners,” particularly France, to limit Germany’s post-unification influence. The current narrative portraying the Euro as a German ploy to subjugate southern European nations is ironic, highlighting the absurdity of such populist claims.
The US Factor: A Hidden Hand?
It’s impossible to ignore the significant role of Goldman Sachs, the US investment bank, in this saga. Not only were they instrumental in creating the problem, but they also chose the worst possible moment, amidst the most severe financial crisis in 80 years, to raise concerns.
While I’m not prone to conspiracy theories, this seems more than a coincidence, especially considering the close ties between Goldman Sachs and the US government and the US’s well-known aversion to the EU and the Euro.
The EU collectively holds immense economic power, surpassing the US in both population and GDP. A politically unified EU would wield substantial political influence, holding two seats on the UN Security Council, possessing a nuclear arsenal, and commanding unparalleled economic strength, all with significantly less global animosity compared to the US. A strong and unified EU doesn’t serve US interests. As the NSA scandal demonstrated, national interests supersede alliances, and shared goals are transient.
While the EU as a whole poses a challenge to US interests, the Euro presents a more direct threat. Not only is it a stepping stone towards political unification (especially if my theory about its intended purpose holds true), but it has also started to challenge the dollar’s dominance as a reserve, trade, and petrocurrency.
This is problematic for the US because the dollar’s global dominance allows the US to operate with significant trade deficits, expand its money supply (“print money”), and engage in other unorthodox economic practices without experiencing the typical consequences of high inflation and interest rates.
While part of the answer lies in the “confidence fairy” (a term Professor Krugman uses to criticize other economic phenomena), a significant factor is the global demand for US dollars, which effectively absorbs the excess dollars printed and spent by the US.
The emergence of an alternative reserve and trading currency threatens this delicate balance. Not only would this new currency reduce the demand for dollars, but it could also trigger the release of existing dollar reserves. The resulting influx of dollars into the market could have disastrous consequences for the US economy.