Tens of thousands of people came to Athens Syntagma Square to hear Greek Prime Minister Alexis Tsipras call for a 'No' vote in the upcoming Greek austerity referendum, July 4, 2015. Debets/Press Association. All rights reserved. I
A call on the IMF: Since July 2015, the IMF has called on European governments to forgive a significant chunk of the Greek government’s unrepayable debt. Why doesn’t the IMF itself forgive the debt owed to it by Greece? The IMF, in concert with the European Union, repeatedly and arrogantly dismissed sound economic advice and norms. The result: the Greek economy has suffered lasting damage and, even more grievously, Greek citizens have lost their voice in charting their own country’s economic future. Since European authorities are busy rewriting history, the IMF must forgive Greek debt to show that someone is accountable to the people of Greece.
In the latest Article IV report on Greece, the International Monetary Fund (IMF) begins its economic health check with this dramatic but, by now, depressingly familiar chart.
Nine years have passed since Greece’s crisis began in October 2009. Since then, Greek GDP fell by 25 percent and is stuck at that level. More than a third of Greeks live below the poverty line; young and working-age people are at especially high risk of poverty. Young Greeks, facing uncertain job prospects at less than living wages, continue to leave the country in large numbers.
The United States also experienced a 25 percent decline in GDP during its Great Depression, but (as the IMF’s chart shows) by the seventh year after the start of that crisis, GDP was back to where it began. Other than perhaps Venezuela, Greece has experienced the most extraordinary economic devastation in a country not plagued by civil or external war. And unlike the mindlessly self-inflicted Venezuelan disaster, the Greek devastation has occurred under the tutelage of the IMF, European governments, and the European Central Bank (ECB). Other than perhaps Venezuela, Greece has experienced the most extraordinary economic devastation in a country not plagued by civil or external war.
Technically, on August 20, Greece “exited” from its financial bailout program that the IMF and European Institutions (EIs) have administered since May 2010. A chorus of European leaders rushed to “pat themselves on their backs.” Donald Tusk, president of the European Council, was first, with an ode to “European solidarity.” German finance minister Olaf Scholz described the “rescue of Greece” as a “measure of European solidarity.” Olli Rehn, European economic and monetary affairs commissioner through much of the Greek program, wrote, “It is time to note #Europe has stood by Greece.”
Such self-congratulatory missives – implying a fanciful picture of Greek economic achievement aided by the sagacity of European authorities – were utterly discordant with the widely perceived reality. As philosopher Ludwig Wittgenstein may have said, European leaders were trying to bewitch the mind by means of language. The political theorist Hannah Arendt would have understood the phenomenon. More than a half century ago, she wrote, “Truth and politics are on rather bad terms with each other, and no one, as far as I know, has ever counted truthfulness among the political virtues.” In this age when “truth is not truth,” the duplicitous language used by European leaders should not be a surprise.
The real problem is with the word “exit.” The IMF’s report makes clear that the Greek government’s policies and actions will continue to be tightly reviewed by the European Institutions:
“Nonetheless, given the high European official sector exposure to Greece (close to €260 billion), Greece will engage in ‘enhanced’ post-program monitoring (PPM) with the EIs, which entails higher frequency (quarterly) engagement and monitoring of specific policies than in the other Euro Area post-program countries.”
Translating this polite bureaucratic language, Greeks owe the EIs €260 billion – and so will remain beholden to them. The EIs have promised to forgive some part of the debt, but the slow drip of forgiveness will require Greek governments to act as the EIs specify. Already on August 22, a Greek news website wrote that the “post-programme era” would begin with an immediate visit by the “institutions” to discuss Greece’s budget for 2019. Greece is technically exiting the bailout program, but there is no true exit: Greece’s parliament will have limited economic decision-making authority for years, or perhaps decades.
“I am just amazed that this continues”
Greece became a member of the European Economic Community (forerunner of the European Union) in January 1981. The European Commission had advised against rushing Greece into the Community. The Commission’s concern was that once Greece complied with the requirement of lower trade tariffs, Greek producers would not be able to compete against foreign competition. But French president Valéry Giscard d’Estaing insisted – some say, in an effort to protect Greece’s fledgling democracy.
The Greek economy was, indeed, uncompetitive. The government twice borrowed from the European Community; twice it did not live up to the commitments under which it had borrowed. But worse, Prime Minister Andreas Papandreou fostered a deeply corrupt political system, which sucked in all political parties.
Greece clearly did not belong in the eurozone. But German chancellor Gerhard Schröder, in a bid to prove his pro-European credentials, waved Greece into the euro area, while other senior European officials cheered the enlargement of the single-currency zone as a marker of its success. Greece became a member of the eurozone on January 1, 2001, and a December 2004 audit of Greek fiscal accounts revealed that Greece’s fiscal deficit around the time of the euro entry decision was, in fact, significantly higher than reported. The Greek government had fudged its accounts to qualify for entry. Joaquín Almunia, the European economic and monetary affairs commissioner, said he had not known. Greece’s euro entry decision, he said, relied on the “best available evidence” at the time. But he acknowledged, “We had a very sad experience in the case of Greece.”
The 2004–2007 global economic bubble kept Greece and other eurozone periphery economies afloat. Indeed, Greece seemed to have escaped the brunt of the global financial crisis. On July 20, 2009, the IMF issued a cautiously optimistic Article IV report on Greece. The aftershocks of the collapse of Lehman Brothers in September 2008 were still being felt worldwide. But Greek banks, the IMF concluded, were stable; they had adequate reserves to deal with more adversities. While the IMF made its customary pitch for more fiscal belt-tightening, it complimented the government for “welcome” measures to rein in its budget deficit.
When the IMF’s executive directors (representing the shareholding member countries) met to discuss the report on July 24, a cryptic sentence about the poor quality of Greek statistics worried Sweden’s Jens Henriksson. “I am just amazed that this continues,” he said. Were the Greeks incompetent, he asked, or were they intentionally making up the numbers? It was a closed-door meeting, and the remarks would not become public for another five years. The IMF economist in charge of Greece, Bob Traa, responded frankly. Incompetence, he said, was not the problem. Greece’s leaders consciously chose to mislead, Traa explained, because if they revealed the severe problems they faced, they would invite unwelcome criticism. By doctoring the numbers, they hoped to “control the message.”
On October 4, George Papandreou, son of Andreas Papandreou, was elected Greek prime minister. Despite the IMF’s rosy depiction, corruption was still rampant, and life was hard, especially for the young. At an election rally some days earlier, a thirty-year-old unemployed accountant had forlornly said, “we vote for hope.” And in his moment of triumph, Papandreou bravely declared, “We are a country with great potential.” He promised “deep changes” to create a “just and equal” society.
Starting October 8, government officials announced that the budget deficit for the year would not be 6 percent, as previously anticipated. The new estimate steadily climbed to 12.5 percent. Almunia again bore the brunt of the embarrassment. He meekly said, “These serious discrepancies will require an open and deep investigation of what has happened.” Jean-Claude Juncker, head of the Eurogroup (the group of eurozone finance ministers), who also knew of the brewing problems, threw in more meaningless words: “The game is over, we need serious statistics.”
Greek leaders had delivered to their people a corrupt, bankrupt, and dispirited nation, while European and IMF officials had little to offer except an occasional word of cheer. For their acts of omission and commission, together they now faced a rushing financial crisis.
“Not on the table”
German chancellor Angela Merkel took note some months later, in December 2009, commenting, “We have problem children in Europe.” But she was politically hamstrung. She understood that German taxpayers would punish her if she lent Greece a helping hand. So, she put her faith in Greece miraculously solving its own problems. The Greek crisis steadily intensified.
From the start, it was clear that the Greek government’s creditors needed to bear substantial losses. In public, the Wall Street Journal’s editors advocated imposing losses on creditors. In two editorials in April 2010, they argued that the alternative would be extreme fiscal austerity, which the Greek economy would not be able to bear. Nearly simultaneously, in closed-door meetings of the US Federal Reserve’s monetary decision-making body, the Federal Open Market Committee (FOMC), economists spelt out the logic. If the Greek government miraculously implemented the extraordinary tax increases and spending cuts that European governments and the IMF were proposing, businesses and households would contract rapidly and GDP would fall sharply. Since tax revenues would fall along with GDP, the budget deficit would not shrink as much as anticipated. Because of the decline in GDP and the smaller-than-expected deficit reduction, the debt burden – the debt-to-GDP ratio – would rise from its already high level. Interest rates paid by the government would quickly go up. The economists at the FOMC concluded that although European authorities considered “debt restructuring” (a euphemism for forcing losses on creditors) to be “unthinkable,” the austerity-centered financial bailout would soon enough make restructuring “unavoidable.”
Olivier Blanchard, the IMF’s chief economist, understood the logic only too well. In a confidential memo to his bosses, he laid out the numbers that had led the FOMC economists to conclude that a debt restructuring was “unavoidable.” The Greek government could repay its debt through austerity, he wrote, but not with a “high degree of probability.” In essence, the staff report said that only under some hopelessly optimistic scenarios could the government honor its debts. At the Executive Board meeting on May 9, 2010, René Weber, the IMF’s executive director from Switzerland, who was not privy to Blanchard’s memo, made a powerful case for immediate restructuring. Chris Legg, the Australian executive director, reminded the Board that the IMF had gone through a painful experience with Argentina not long before. The delay in restructuring then, he pointed out, had only made the problem worse, which the IMF itself later recognized in one of its customary mea culpas. Other executive directors, including India’s Arvind Virmani, chimed in.
To all of the executive directors calling for immediate restructuring of Greek debt, Poul Thomsen, the IMF’s man in charge of the bailout program, had a simple answer. It was “not on the table,” he said, because European authorities, supported by US Treasury Secretary Timothy Geithner, claimed that any restructuring initiative would lead to a Lehman-like panic and global financial meltdown. In the eurozone, the ECB was the most vociferous proponent of this view. Neither contemporary assessments – such as those by the Wall Street Journal and FOMC economists – nor later academic studies supported this dire prediction of financial contagion. Yet, the view took hold. As Lee Buchheit, the veteran sovereign debt attorney, trenchantly said, the ECB had “the mentality of a six-year-old boy who gets it into his head that demons lurk just beyond his bedcovers in a dark bedroom. Panic grows with every hour.” His description applied to all the politicians and technocrats who mattered.
Switzerland’s Weber tried one more time. Didn’t the IMF’s rules, instituted after the Argentina debacle, require that a potential borrower’s debt be restructured if the government’s debt was not repayable with “a high degree of probability?” Since IMF staff refused to say that the Greek government would repay debt with high probability, why was there even a choice? IMF management had changed the rules to allow the Greek program to go ahead. The management invoked the specter of contagion, for which, a dejected Weber pointed out, it had offered no evidence. The IMF’s first deputy managing director, John Lipsky, was annoyed by this point. Even a discussion of debt restructuring, he said, could cause market tremors. There was “no Plan B,” he said.
In Athens, a few days earlier, Greek legislators had made a bid to soften the austerity being required of the Greek population, to “make the wage cuts less steep or find less painful alternatives.” As angry protestors outside the parliament building chanted, “Let the Whorehouse Burn,” Finance Minister George Papaconstantinou told the parliamentarians inside that it was too late to make any changes. “It was a take-it-or-leave-it proposition,” he said. As angry protestors outside the parliament building chanted, “Let the Whorehouse Burn,” Finance Minister George Papaconstantinou told the parliamentarians inside that it was too late to make any changes.
With that, the austerity-laden Greek program went ahead. Briefly, IMF’s Thomsen and German finance minister Wolfgang Schäuble lauded the Greek government for its brave efforts to fulfill the program’s requirements. But the arithmetic of austerity quickly and ferociously bit in. Exactly as predicted, the Greek economic collapse began.
The Greek citizens’ rebellion
Alongside the economic implosion between 2011 and 2014, Greek democracy was utterly eviscerated. In 2011, George Papandreou proposed holding a referendum to ask Greek citizens if they were willing to bear the unbearable austerity. Papandreou was hauled up before Merkel and French president Nicholas Sarkozy, who told him that if he went ahead, he risked stoppage of the bailout funds. Papandreou resigned. He was replaced by the unelected, technocratic Lucas Papademos, a former ECB vice president, who enforced the austerity measures demanded by the creditors and finally undertook, in March 2012, the necessary restructuring of privately held Greek debt. Private creditors took historically large losses. But this was not enough. European authorities were forced to provide relief on official debt, which they did in driblets. Every several months, they lowered the interest rates on their loans and extended the duration of repayment. Yet, the Greek government barely stayed afloat, and kept borrowing from its official creditors to repay them.
As elections approached in May 2012, the economy was in chaotic decline. The unemployment rate was surging toward 25 percent. In their desperate search for alternatives to their crushing economic pain, Greek citizens gave Syriza, the anti-austerity and, until then, fringe political party, 17 percent of the vote. Alexis Tsipras, Syriza’s thirty-seven-year-old leader, called for an end to “barbaric austerity.”
Tsipras’s rhetoric was not welcome in Berlin or Frankfurt. Jörg Asmussen, until recently a minister in Merkel’s government and now an ECB Governing Council member, spoke as a German politician rather than as a neutral central banker. He had a tough message for Tsipras: “Greece needs to be aware that there is no alternative to the agreed reform programme if it wants to remain a member of the eurozone.” The bullying tone adopted by Asmussen and others encouraged greater defiance in Greece. When the May elections failed to deliver a governing coalition, Greek citizens gave 27 percent of their votes in June’s follow-up election to Syriza, which established itself as the leading opposition party.
Amidst this people’s rebellion, a technocratic interlude of some importance transpired. Everyone agreed that governments that lived beyond their means needed to tighten their belts. Therefore, the debate was not about whether to implement fiscal austerity, but rather about how quickly to tighten the belt. In October 2012, the IMF’s Blanchard and his colleague Daniel Leigh gave a clear answer: not too quickly in the midst of a recession.
The caution on excessive and too-rapid austerity rested on a number known as the fiscal multiplier. Blanchard and Leigh estimated that if the economy was already weak and a government cut spending (or raised taxes) by a euro, GDP would fall by nearly two euros; thus, the fiscal multiplier during a recession was close to 2.0 and not 0.5 as the IMF had previously assumed. Quite simply, Blanchard and Leigh were saying that in the conditions prevailing then, aggressive austerity was causing GDP and, hence, tax revenues to fall far too rapidly, and so, paradoxically, austerity was increasing the burden of repaying debt; it was causing the debt-to-GDP ratio to rise. Virtually every published research study agreed with the Blanchard-Leigh analysis and recommendations. Yet, despite the overwhelming scholarly evidence, European authorities reacted furiously to the Blanchard-Leigh estimate of the fiscal multiplier.
Yet, despite the overwhelming scholarly evidence, European authorities reacted furiously to the Blanchard-Leigh estimate of the fiscal multiplier. The estimate could not be correct, they said, because they knew that austerity did not cause a slowdown in growth. To the contrary, they claimed that fiscal restraint by governments helped instill confidence that taxes would be lower in the future and that such confidence encouraged investment and growth. European politicians and technocrats insinuated that Blanchard and Leigh had improperly used the prestige of the IMF to question the deeply held European belief that austerity was always an honorable undertaking. Despite the overwhelming scholarly evidence, European authorities reacted furiously to the Blanchard-Leigh estimate of the fiscal multiplier.
The most remarkable expression of this conviction was an angry letter, dated February 2, 2013, and posted some days later on the European Commission’s website. Addressing European finance ministers, European Commission vice president Olli Rehn said that not only was the Blanchard-Leigh research wrong, it had certainly “not been helpful.”
Those who were not in European policy and intellectual inner circles gasped in disbelief. Soon the Rehn letter became the object of ridicule. “No debate please, we’re Europeans,” was the title of a particularly trenchant critique authored by Jonathan Portes, director of a London-based think tank, the National Institute of Economic and Social Research. “It just seems bizarre,” Portes wrote, that Rehn should be trying to muzzle a “theoretically based and empirically grounded” academic paper on a subject of great contemporary importance.
Meanwhile, Syriza steadily gained ground while economic conditions remained bleak. By December 2014, it appeared that Syriza, with its promise to lighten the burden of austerity, was on its way to a parliamentary victory. German finance minister Schäuble relayed a warning from Berlin: “New elections change nothing.” The Greek government, he said, echoing Asmussen from nearly three years earlier, must stick to the program in place.
On January 25, 2015, Greek citizens responded by electing Syriza to power with a comfortable parliamentary majority. Tsipras became prime minister with a mandate to negotiate debt relief and dial down the austerity. European leaders – fiery advocates of democratic ideals – were aghast at the Greek people’s revolt against policies dictated from Berlin, Brussels, and Frankfurt. The international media faithfully echoed dire predictions for Greece’s fate. European leaders – fiery advocates of democratic ideals – were aghast at the Greek people’s revolt against policies dictated from Berlin, Brussels, and Frankfurt.
“It’s a take-it-or-leave-it offer,” once again
As in all economic matters during the Greek crisis, the received wisdom was clear. To forgive debt is twice-blessed. The debtor’s burden is reduced and the creditor gains because the debtor is now more reliably able to service the remaining debt and is a better counterpart for transactions in the future. The wisdom goes back at least to John Maynard Keynes, who in 1919 had argued for canceling Germany’s debts and limiting the war reparations owed to the victorious Allied governments. Enforcing those payments would impoverish Germany, Keynes said, in which case, he famously warned, “vengeance, I dare say, will not limp.” Among contemporaries, U.S. president Barack Obama said to CNN’s Fareed Zakaria that it was wrong “to squeeze more and more out of a population that is hurting worse and worse.” Jeffrey Sachs, Columbia University economist and sovereign debt specialist, was a Syriza advisor and advocate.
Stripped of drama, Syriza’s demand was simple: debt relief, which would allow less austerity. This demand had overwhelming support in both the scholarly economics literature and the practice of economic policy. Finance minister Yanis Varoufakis’s specific proposal was that Greece would repay its debt by a formula linked to GDP: debt servicing would be greater when Greek GDP was growing faster. This would allow less austerity, especially in slow-growth phases.
To be sure, the frenzy at the moment was great. Syriza’s leaders were impatient; European leaders were horrorstruck. European authorities and the IMF held all the cards, and it would have done them great credit to recall Arendt’s cautionary words: “To hold different opinions and to be aware that other people think differently on the same issue shields us from Godlike certainty which stops all discussion and reduces social relationships to an ant heap.” The Greek people had made an eminently sensible plea. Was anyone accountable to them? True democratic leaders would have recognized in that moment a need to deliberate and reach a sensible compromise. The Greek people had made an eminently sensible plea. Was anyone accountable to them?
But European authorities never allowed a conversation around the core imperative of reducing Greece’s debt burden. Syriza formed a government on January 25, 2015. On January 31, Erkki Liikanen, governor of Finland’s central bank and, in that capacity, a member of the ECB’s Governing Council, threatened that the ECB would stop funding Greek banks if the Greek government did not agree to the terms of the creditors. And on February 4, the ECB decided Greece’s fate. In an aggressive move that took everyone by surprise, the ECB cut off funding to Greek banks, preemptively immobilizing the Greek government before it could begin negotiations with its creditors. The ECB withdrew an earlier arrangement under which Greek banks used their government bonds as collateral (security) to obtain funds for running their day-to-day operations. Although Greek government bonds had a junk rating and normally only higher-rated bonds qualified as collateral, the ECB had waived that requirement to help the banks stay afloat. With its February 4 decision, the ECB revoked that waiver. Greek banks could now borrow only from the Greek central bank under an Emergency Liquidity Arrangement (ELA); ELA funds carried a higher interest rate and, moreover, could be turned off at any time, thus choking the Greek financial system.
Stock prices of Greek banks fell sharply, and two days later, the rating agency S&P pushed the government bonds’ rating further into junk territory. With continuing deposit flight from Greek banks and the threat of a financial meltdown, the Syriza government rapidly lost all leverage before it could use its economic argument in a political negotiation.
Only the unpredictable Juncker, by now European Commission president, had a moment of clarity. On February 18, he said, “We have sinned against the dignity of the people of Greece, Portugal, and sometimes Ireland.” He added, “Everything that’s called austerity policy is not necessarily austerity policy. Because often those austerity policies end up being excessive.” Previously, as Luxembourg’s finance minister, Juncker had himself been part of the collective creditors’ decisions on the Greek program. Recalling his complicity in the formulation and enforcement of the policies he was now criticizing, Juncker added, “I seem stupid for saying this, but we need to learn lessons from the past and not repeat the same mistakes.” He even questioned the “democratic legitimacy” of European creditors and of the IMF in their unaccountable rush to impose punitive policies. But Juncker’s inexplicable truth-telling did not fit the accepted narrative. The mainstream media ignored his statement. Juncker’s inexplicable truth-telling did not fit the accepted narrative... The mainstream media ignored his statement.
Through the first half of 2015, the IMF stood firmly on the side of the European creditors. While the northern members of the ECB’s Governing Council – supported by France’s Benoît Coeuré and President Mario Draghi – kept up threats of halting disbursement of ELA funds to Greek banks, the IMF added to the pressure on Greece. It did so by remaining silent on the matter of debt relief and by reinforcing the demand that the Greek government achieve a primary budget surplus (a surplus net of interest payments) of 4.5 percent of GDP, insisting especially and repeatedly on wage and pension cuts. Thus, despite the internal warning by Blanchard and Leigh, the IMF’s April 2015 projections foresaw the Greek primary surplus reaching 4.5 percent of GDP by 2016 and remaining near that extraordinary level as far as the projection horizon. Coming on top of the unprecedented austerity, such further demand for belt-tightening would have strangled the Greek economy.
The IMF’s management was acting, as it often does, in step with its major shareholders’ preferences. Obama could have restrained the IMF. But despite having talked a good game, he was unwilling to lend his political weight to the Greeks. The German position held sway over the IMF’s management and board. Obama could have restrained the IMF. But despite having talked a good game, he was unwilling to lend his political weight to the Greeks.
It was my position in those months that the Greek government be called on to maintain a primary budget surplus of 0.5 percent of GDP and nearly all of Greek debt be written off so that in three years, with its extremely low debt burden, the government could be ready to borrow from private lenders on debt contracts that allowed for automatic debt restructuring upon reaching clearly defined stress triggers. Such debt contracts would limit the incentive to borrow and lend. None of this, however, was politically feasible.
On June 25, five months after Syriza came to power, Varoufakis brought up the question of debt relief again at a meeting of European finance ministers. Repeatedly rebuffed by the ministers, he turned to the IMF’s managing director Christine Lagarde, who also attended these meetings. Varoufakis said, “I have a question for Christine: Can the IMF formally state in this meeting that this proposal we are being asked to sign will make the Greek debt sustainable?” Lagarde knew the answer to that question. In an analysis just completed, IMF staff had concluded that without substantial debt relief, the Greek government’s debt would remain “unsustainable”; the government would never be able to repay its debts. But before Lagarde could respond, Dutch finance minister Jeroen Dijsselbloem told Varoufakis, “It is a take it or leave it offer, Yanis.” It was always take it or leave it: in May 2010 and June 2015.
In the late evening of June 25, Tsipras announced that on July 5, Greek citizens would vote in a referendum whether to accept the creditors’ terms. On Saturday morning, June 27, eurozone “partners,” as they called themselves, assembled in Brussels to deny Greece extension of the financial assistance program due to expire on Tuesday. Depositors in Greek banks panicked and began withdrawing their money. On Sunday, as cash machines ran dry, the ECB froze the level of ELA that the Greek central bank could provide its banks. The panic escalated, and the government imposed controls on the amount of cash withdrawals. Greek banks would not open on Monday morning.
On Thursday, July 2, the IMF’s report, which made clear that the Greek government’s debt was unsustainable, was leaked. Thus, Greek citizens went into the referendum knowing that their government could not repay its debts and, facing limits on how much money they could withdraw, they could foresee that a no vote would entail months of hardship.
Yet, on July 5, 61 percent of Greeks voted oxi, a resounding no. In fact, a student said she had voted “Oxi, oxi, oxi.” “What you have heard,” she exclaimed, “is the voice of the people, the rage of the gods.” According to one estimate, 85 percent of those between the ages of eighteen and twenty-four voted oxi. A student who had just completed her master’s degree said, “I have absolutely no chance of work; basically, I am being told to emigrate.” “What you have heard,” she exclaimed, “is the voice of the people, the rage of the gods.”
Historians will debate whether Tsipras was foolish or naïve in calling the referendum. But it did give the Greek people one more chance of saying they had not been heard and no one was accountable to them. We will never know what might have happened had Tsipras followed the people’s mandate and rejected the European demands. He chose to return to the European fold and the Greek economy continued to muddle through to its exit.
Greece needs debt relief so that the economy can grow again
Upon its “exit,” the Greek government is required to maintain a primary surplus of 3.5 percent of GDP through 2022. The required primary surplus will decline after 2022, but will average 2.2 percent a year until 2060. Debt relief by European creditors will be tied to the achievement of these surpluses.
The IMF has since July 2015 been an advocate of Greek debt relief, as long as Greece pays back the debt it owes to the IMF. The IMF, which not so long ago insisted on a 4.5 percent of GDP surplus, now emphasizes that maintaining even a 3.5 percent of GDP surplus requires the Greek government to “severely compress” investment in the country’s future.
Thus, if the government does attempt to maintain the European primary surplus targets, those surpluses will help pay down debt immediately, but because economic growth will fall, the debt burden, in the IMF’s words, will “follow an explosive path over the longer term.” Conclusion: Greece needs substantial debt relief now along with more modest primary surplus and GDP growth targets. Conclusion: Greece needs substantial debt relief now along with more modest primary surplus and GDP growth targets.
With a straight face, the IMF says it “has consistently argued that Greece can reasonably be expected to sustain a long-run primary surplus of no more than 1.5 percent of GDP and annual real GDP growth of around 1 percent, and that even achieving these outcomes will require Greece to undertake profound structural reform over time.”
I have good reason to stick by my earlier insistence that the Greek primary surplus be no more than 0.5 percent of GDP. In a brilliant new paper, two IMF economists provide extensive documentation of what has long been known: extended periods of economic stagnation leave the economy deeply weakened, leading to “permanent output losses.”
Greece is the poster child of such an analysis. For nearly a decade, Greece has cut back on investment in human and physical capital. But there is more. The Greek population is rapidly aging. Between 2020 and 2060, Greece’s working-age population will decline by 35 percent! Meanwhile, discouraged by bleak prospects at home, the best and brightest are leaving to seek their fortunes elsewhere. Left without its best people, the traditionally low Greek productivity growth could fall to abysmally low rates. Fiscal pressures will increase as fewer working-age people support the elderly, which means that the best people will continue to leave. Greece needs a Marshall Plan-style investment program to reverse this treacherous economic descent.
Who is accountable to the people of Greece?
I have written this essay not to point out the repeated failures of European and IMF policymakers to learn from their mistakes. That story is generally known. For the IMF, its own Internal Evaluation Office has just produced another damning report. Rather, I have highlighted and emphasized that key decision makers were made well aware of the “mistakes” they were committing before they made their decisions. They, however, felt free to disregard any advice or evidence that did not suit their purpose—and they defined their purpose purely as the protection of what they saw as their own self-interest.
The structure of the eurozone, despite soothing words like “solidarity,” creates vast imbalances in economic power. Those enjoying the upper hand have no reason to explain their actions. It is always “take it or leave it,” “it is not on the table,” or “elections don’t change anything.”
Thus, the Greek story is not a story of unfortunate technocratic errors. And it is not just about what went wrong in Greece, grim though that is. Rather, it is about a colossal failure of accountability in international governance. Mechanisms of international governance are presumed to rely on benign, technically sound decision-making bodies. That presumption, however, is far removed from reality. Politics operates unchecked in the rarified technocratic realm within which international actors operate. And since the international media are deeply beholden to the prominent and glamorous international actors, all contrary voices are caricatured and dismissed. The Greek story… is about a colossal failure of accountability in international governance.
The IMF sits at the pinnacle of international governance. More so than any other international agency, the IMF, with its command over vast resources at moments of raging financial crises, exercises an almost mystical authority. Given the grievous consequences of undermining an IMF rescue operation, the IMF is almost always insulated from public criticism while the crisis is ongoing. And the IMF dutifully issues mea culpas, which – more than in other bureaucratic organizations – are candid documents. But here is the rub: the IMF commits the same errors again and again. In the Greek program, the errors were repeated within the course of the long operation even though the evidence was there to behold.
For this reason, given the delusional austerity required by the IMF and European lenders in Greece, it is only right that the IMF forgive Greek debt. Not just to compensate Greek citizens but equally to hold itself accountable and, hopefully, prevent such gross negligence in the future. Greece still owes the IMF $9 billion. The amount to be forgiven is, therefore, small in relation to total Greek debt but is sizeable enough to acknowledge the IMF’s accountability.
I recognize that the IMF will require the concurrence of its Board, and European authorities could assemble a coalition to nix the idea. But at least the Europeans will be forced to defend their position before their international peers. Perhaps, European governments will be shamed into more rapid debt forgiveness, which would allow the Greek government greater autonomy in decision-making.
To the Greeks, the promise was that joining the European Community in 1981 would safeguard their fragile democracy. We will never know what might otherwise have happened. Mercifully, Greece has not returned to dictatorship. That, however, can be small consolation to Greek citizens who have suffered decades of indignity inflicted first by their own leaders and then more insidiously by European politicians and technocrats in Berlin, Brussels, Frankfurt, and Washington.
Up until the second half of the twentieth century, colonialism meant occupation, like British rule of India. Over the decades, that form of colonialism ebbed worldwide. It was soon replaced, however, by a creeping economic colonialism, justified as necessary to harness the benefits of integration. Powerful corporations and nations dictated an increasingly wider range of economic policies to weaker countries. The European handling of the Greek crisis takes economic colonialism to a twenty-first-century high-water mark.
I suspect that in my lifetime, the Greek parliament will continue to rubber stamp decisions made in Berlin, Frankfurt, and Brussels. Greeks will continue to live in a colony with their economic life administered by the European Union. The likes of French president Emmanuel Macron and his admirers will continue to sing the virtues of an idealistic “European sovereignty.” That the euro, touted as essential to overcome the memories of Europe’s disastrous wars, should lead to modern economic colonialism is shocking – but to those who have followed the history of this project, it should not be a surprise.
[This essay draws heavily on the author’s book, EuroTragedy: A Drama in Nine Acts, to reflect on recent developments.]
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