Financial newspaper Wall Street Journal (WSJ) claims that the true Greek drama is about the deep reforms necessary in the country’s economy and not a possible debt write-off. The piece accuses Greek governments across the political board of having built a ‘generous’ welfare state that covered their interests of many pressure groups. The piece admits that a debt haircut would have been the best choice in 2010 and not 2012. From Simon Nixon in the WSJ:
Greece is invariably held up as Exhibit One in the case against the European Union. Its six-year debt crisis—now threatening to reignite right before a British referendum on EU membership—is often presented as proof that the EU is an anti-democratic, sovereignty-destroying, austerity-loving bully. But this narrative is wide of the mark. The starting point for any debate is to recognize that most of the blame for Greece’s problems lies with Greece itself, which in the decades before the crisis embraced a catastrophically unsustainable economic model and has largely refused to change it since.
For sure, mistakes were made in the design of the country’s first bailout: It would have been better for Greece, if not the eurozone, if government debt had been restructured in 2010 rather than in 2012. And it is true the program’s fiscal targets have been demanding, as they always are when a country is obliged to rely on other countries’ taxpayers to service their debts and fund their state. But Greece has always had full sovereignty to choose how to hit those targets—and much of the calamity that has since unfolded stems from how successive governments exercised that sovereignty.
Over decades, Greek governments of left and right built an egregiously generous welfare state and lavished protections on a wide range of interest groups, funding their largess via reckless borrowing and by levying ever-higher taxes on an ever-narrower base of taxpayers. When the crisis hit, Athens didn’t abandon this model. It doubled up on it.
Government officials have consistently prioritized protecting public-sector jobs and wages over spending on equipment and medicines for hospitals or maintaining vital infrastructure; they have insisted on preserving a pension system that provides basic retirement incomes higher than Germany over spending money on education and training; they preserved an income-tax system that exempts an astonishing 55% of workers (compared with 2% in Ireland and 4% in Portugal) over easing the burden on job-creating businesses. The biggest victims of these growth-sapping choices have been the young, who have had to endure sky-high levels of unemployment.
Greece’s creditors recognized this problem long ago. That is why, when they drew up a second bailout program in 2012, they tried to limit Greece’s discretion over policy choices and be more prescriptive about the changes Greece needed to implement to qualify for more loans. They insisted that the only realistic way the country could ever put its current finances back on a sustainable footing and create the conditions for the private sector to grow was to broaden the tax base, revamp the public sector and cut a pension bill that was consuming 17% of the annual budget. For the last four years, the creditors have tried to force Greek governments to deliver on these commitments, using the only leverage they have over Athens: their ability to withhold bailout funds, putting the country at risk of a disorderly default.
Yet even this pressure hasn’t been able to persuade Athens to change course. The current standoff is a continuation of the same clash that led to the fall of the previous conservative government, two general elections and a referendum last year. Faced with the budget gap arising from its previous policies, Athens has insisted on another round of tax increases targeting the rich.The difference this time is that one of Greece’s main creditors, the International Monetary Fund, is refusing to sign off on the plan. It doesn’t believe Greece’s proposed policies will deliver the 3.5% budget surplus before interest costs that Athens promised under the program. The IMF’s preference would be to drop the surplus target to a more realistic 1.5%, but that is politically toxic for other eurozone countries, so the IMF is insisting on contingency measures that it says must include the long-avoided overhauls.
In this context, the debate over debt relief is a second-order issue. No one thinks Greece’s debt is sustainable, except under the most optimistic assumptions. No one thinks Athens will be repaying any debt for years to come. No one thinks Greece will be funding itself in the market for decades. The main reason debt relief matters—other than to hand Athens a symbolic political prize—is that the IMF can only lend if it thinks a country will regain market access by the end of the program, an outcome that seems highly unlikely without clarity over its long-term debt burden. For the IMF to participate in the bailout—a core German condition for future disbursements—a formula must therefore be found that balances the IMF’s need for clarity with Germany’s desire to retain sufficient leverage to ensure Athens doesn’t go back to its old ways.
But while eurozone finance ministers this week agreed to start discussions on debt relief—a concession by Germany that had previously insisted such talks should wait until after a deal on Greece’s reforms—this is an issue for another day. The real drama remains the continuing four-year standoff over the overhauls, which can only end one of two ways: Either Greece must finally agree to abandon its failed economic model, or Germany must abandon its insistence on IMF participation in the bailout program, thereby allowing the eurozone to give Athens enough money to tide it over its short-term liquidity challenges—in other words, postpone any long-term resolution of the crisis. The alternative is another debilitating Greek debt crisis right in the middle of Britain’s June referendum on whether to stay in the EU.
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