This deal, though offering significant assistance, is a large intrusion on Greece’s sovereignty. (In fairness to the creditors, many believe that Greece cannot successfully steward that sovereignty. Especially over the last few months, the nation that brought democracy to the world centuries ago makes democracy today look like middle-school student government distracted by summer vacation.) Greece has to accept a suite of policies its citizens rejected at Tsipras’s urging in a referendum just days ago. Europe is micromanaging reforms to Greece’s labor and product markets. Outside institutions will supervise Greece’s domestic economy and an overhaul of its public administration. The $55 billion asset fund will be supervised by Europe. And Greece will have to reverse the spending measures it enacted just months ago.
A firm pledge by Europe to reduce the nominal value of Greece’s debts would have helped the medicine go down. It is unfortunate that it wasn’t included, and that only the possibility of making the debt more sustainable was left on the table.
It is true that Greece borrowed recklessly. (And, don’t forget, Greece cooked its books to hide its deficit in order to join the euro zone in the first place.) Some on the left seem to want to downplay this, but it is clearly a material fact. Economist and IMF official Olivier Blanchard reminded last week that before the first bailout in 2010 Greece’s debt was 130 percent of GDP, increasing at 12 percent per year. Greece’s deficit was over 15 percent of GDP. “Had Greece been left on its own,” writes Blanchard, “it would have been simply unable to borrow.” “Fiscal austerity was not a choice, but a necessity.”
But it takes two parties to make a loan. Greece should not be held responsible for reckless borrowing and reckless lending. In addition, a lower debt-to-GDP ratio might foster a Greek political climate in which needed reforms and economic growth can take place, which should be everyone’s goal. And most acutely, a nominal cut would help Tsipras get this deal through his parliament.
It is not at all clear that this plan will succeed. The Greek parliament may struggle to pass much of it, especially on such a tight timeframe. On the one hand, the Greek parliament won’t want to enact the provisions that the Greek people just rejected. They also won’t want to privatize state-owned assets. On the other hand, the Greek parliament won’t want to be responsible for delay and a growing economic meltdown. Predicting which of those two forces will be dominate is difficult.
And even if the plan passes, the bailout occurs, the i’s are dotted and the t’s are crossed, Greece still may be unable to meet its obligations due to internal politics or weak growth. European elites may be so committed to the project of European integration that they will continue to bail out Greece until the broader European recovery lifts even Greek boats. If so, then we may be here again in the near future.
Even worse: Greece may need a fourth bailout, and domestic politics in northern Europe won’t allow one, despite the elite’s desires. A lot of (other people’s) money will have been poured into Greece, with the effect only of delaying Greece’s eventual default and exit from the euro zone.
The alternative is for Greece to leave the euro.
Grexit would leave Greece’s economy in shambles. Unemployment would increase significantly. Contracts would have to be rewritten to reflect a new currency. Tax collection, already lacking, would be made even more difficult. The banking system would be in chaos. Productive Greek citizens would flee to other countries. Some economists are confident that contagion to other nations from a Greek exit would be limited. While there is surely less risk of this today than in 2010, uncertainty remains.
Humanitarian relief would be required. The poor in Greece are already suffering. There are lines in Athens for clothing and medicine. Soup kitchens worry that they will run out of food. Measures should also be taken to help Greece’s banking system. In addition, technical assistance from Europe would be required to help Greece implement a parallel currency. (Do you trust Greece’s government to do this well?) Europe should stand willing to help the people of Greece even as Greece exists the euro zone.
The short-term pain could be immense. No one knows with confidence how this would play out.
But short-term pain should not blind us to long-term reality. The euro is an economic mistake. Germany and Greece are different nations with different fiscal policy — and different languages, cultures, and politics. Why would one monetary policy work for both?
If Greece had its own currency it would have been able to deal with the Great Recession and its current crisis through devaluation, making its exports more competitive, and through looser monetary policy than the European Central Bank enacted. It can’t do either because it is stuck in the euro zone. Monetary policy isn’t magic — Greece would still have needed to implement painful austerity and structural reforms. But having its own monetary policy would help.
There is — or, there is supposed to be — a commitment among euro zone countries that the currency union is a step towards fiscal and political union, a sign of mutual support and fraternity. Clearly that commitment has been weakened across the Continent. Between Greece and Germany, that commitment may have been destroyed. It feels today that Greece doesn’t belong in the euro zone.
Greece has already suffered greatly, with income losses and unemployment on par with our nation’s experience in the Great Depression, its banks closed, its citizens cash-strapped, its future uncertain. That Greece is in such bad shape is precisely the reason that now is the time for it to leave the euro zone — much of the damage from a Greek exit has already occurred. The cost of leaving today is much less than it would be in a healthy Greek economy.
And leave today Greece should, beginning the painful work of rebuilding an economy and crafting public policies over which it has primary control, hopefully achieving more success than it has in the past.