Europe cannot agree to write off Greece’s debt

Syriza have won the Greek election. But, perhaps just as startling, the “far left” party is making considerable headway in the struggle to win over elite opinion in the west.

Many mainstream economists and policy makers are so alarmed by the state of the Greek economy that they have come to agree with Syriza’s argument that the only solution is to make a radical cut in Greece’s national debt, which stands at 175 per cent of gross domestic product.


“Greece’s debt needs to be right-sized,” one senior anglophone policy maker told me in Davos. “And the Germans should remember they benefited from official debt relief in the 1950s.” Letters from Nobel Prize winners and several opinion pieces in this newspaper have made similar arguments.

Unfortunately, an explicit Greek debt write-off would cause more problems in Europe than it solved. Three main negative effects could be expected. First, it would cause a political backlash in northern Europe, which would strengthen far-right and nationalist parties. Second, far-left and anti-capitalist parties would gain credibility in southern Europe and would press for similar debt writedowns, as well as much expanded social spending — something that would lead to a collapse in market confidence. Third, the breakdown in trust between members of the EU that would follow a Greek default — even a negotiated default — would make it much harder to keep the EU together.

The focus on the unforgiving stance of Germany raises emotional issues about the second world war — but obscures the fact that almost all Greece’s European creditors take a similar view. It was very hard for politicians in countries such as Finland and the Netherlands to make the case for a bailout of Greece. Their sceptical citizens appeared to suspect that they might never be paid back. (Silly them!) If those fears are now vindicated, the nationalist parties that opposed the bailouts will benefit.

Alexander Stubb, the prime minister of Finland, points out that his country has lent Greece about €1bn — equivalent to just under 2 per cent of the government’s annual budget. To write off half that money in Finland — a country that has also suffered a deep recession — would be politically poisonous. The likely beneficiaries would be the nationalist True Finns party.
That pattern would be replicated elsewhere — with the National Front in France and the Freedom party in the Netherlands likely beneficiaries. Carl Bildt, a former prime minister of Sweden, gave a sense of the reaction in northern Europe, when he tweeted: “Syriza in Greece has won the election by promising that taxpayers in other euro countries will pay even more to them. Rather daring.”


The effects on the politics of Germany — the cornerstone of the EU — would also be noxious. The Alternative for Germany party (AfD), which has now added resentment of immigration to its opposition to the euro, would certainly make gains. One of Chancellor Angela Merkel’s biggest achievements has been to prevent the rise of a far-right party in Germany, similar to those in France, Austria and the Netherlands. That achievement is now in jeopardy.

Europe’s far-left is also cheering on Syriza. The idea that there is an easy way to repudiate debt and end austerity must be incredibly seductive for hard-pressed countries such as Spain, Portugal, Ireland and Italy. Parties including Podemos in Spain, Sinn Féin in Ireland and the Five-Star movement in Italy will gather support if Syriza succeeds in slashing Greek debt. But the prospect of debt-defaults across the eurozone — particularly in Italy or Spain — would then frighten the markets and increase the risk of yet another financial crisis. Everybody would suffer.

ven without a drift to the political extremes or a financial panic, a Greek default would do serious damage. The EU can really only operate if all its members believe that the other countries will respect their financial commitments to each other and obey European law. Once that idea is conclusively undermined, it will become almost impossible to negotiate future agreements. How would you persuade a German or Finnish parliament ever to vote through another European bailout? And how are cherished ideas — such as a banking union — expected to make progress if mutual trust evaporates?

All that does not mean that Greece must simply continue to suffer. Although the overall size of Greek debt is intimidatingly large, there are things that can be done — short of an outright default. The amount of interest that Greece pays on its debt has already been cut and deferred. This policy of “extend and pretend” could be elaborated to lighten the debt burden further. Debt repayments could be deferred until some sustained growth returns to the Greek economy. Combined with the European Central Bank’s radical monetary policies and lower oil prices that would help to restore growth in the Greek economy.

Of course, yet another messy EU compromise would be much less exciting than the debt write-off that Syriza has spoken of. But, given all the other dangers, dull compromise looks strangely appealing.


Gideon Rachman


Fonte: FT