Syriza has triumphed in Greece’s election. The coalition has formed a government and all eyes are turning to the major showdown that’s coming.
The party is demanding a major bondholder “haircut.” This is effectively a form of gentle default. People who bought Greek government debt (bonds) with an agreed return will get screwed, but they will get some of their money back (how much depends on how big the haircut is).
Predictably, Europe’s big institutions and politicians in other countries aren’t exactly happy with the sound of this. Syriza are far to the left of mainstream European politics, and that sort of group isn’t usually associated with sound economic management. A glance at their former constituent parties (Syriza started off as a big-tent coalition) shows that “far left” isn’t an unreasonable way to describe them. “Trotskyism” pops up quite a lot.
So is it true? Are they a bunch of financial incompetents, about to undo the hard but necessary work of austerity?
Not quite. In fact, 87% of economists surveyed by Bloomberg thought Greece would get at least some debt relief if Syriza were elected. A letter including two Nobel prize winning economist calling for debt relief was sent to the FT last week.
Greece’s new finance minister, Yanis Varoufakis, is an economics professor. He’s been wheeled out at pretty much every opportunity to give interviews to the financial media. Here’s what he told Bloomberg (emphasis ours):
Our primary objective is to restore a sense of rationality in the debate surrounding the Greek programme. Let me put it very briefly in a way that our viewers can understand. In 2010 unfortunately, tragically, our nation and particularly our state, became insolvent. How did Europe, official Europe, in its infinite wisdom, address this problem? It did this, in inverted commas, by unloading the largest loan in human history on the most insolvent of European states… It was a typical case of extend and pretend, writ large and applied to a whole nation…
If you’re in denial about a bankruptcy and you treat it like a liquidity problem, and you take a huge amount of money and dump it on an insolvent entity, you’re simply deepening the bankruptcy and extending it into the future.
It’s really hard not to agree once you look at the absurd amount of austerity that Greece would have to implement to meet its current stated goals.
For starters, take a look at Greece’s GDP. In the US, GDP fell by just over 5% from peak to trough, UK’s recession GDP wiped away about 7% of GDP. Both countries are now back above their pre-crisis levels. Greek GDP fell by more than 25% and it’s barely started to tick up again, let alone return to previous levels:
To return debt levels to about 60% of GDP, which is the aim of the EU’s fiscal rules, Greece will have to run a primary surplus (so taking in more in tax than it spends on everything except debt interest) equivalent to 7.2% of its GDP. Every year from 2020 to 2030 (after a whole bunch in the next five years).
If that sounds like it would be painful, it’s because it would be. In fact, it’s so painful that it has close to no precedent in any advanced economy in the whole of recent history. Economic historian Barry Eichengreen looked across 54 countries and 40 years (1974-2013), and found only three occasions where a country has run a primary surplus worth more than 5% of its GDP for a decade. All of these countries (Belgium, Singapore and Norway) had average surpluses smaller than 7.2% of GDP. None had social conditions anything like Greece’s.
This sort of semi-permanent austerity, practically without historical precedent, is a denial of reality (something that Syriza and similar parties are often accused of). It hasn’t happened before, it isn’t going to happen now, and pretending that it will is a symptom of a Calvinist attitude to debt that holds a lot of sway around the world, no matter how much pain it causes.
Most of Greece’s debt isn’t even held by private bondholders or financial institutions. It’s held by international and European institutions:
In short, it’s in their power to do something about it, at relatively little cost (far less human misery than is currently being imposed on Greece).
Dan Davies thinks this is basically an impossibility, and that there’s no chance that there will be any major write-down of Greek debt. There are a lot of reasons that he might be right. For starters, if Europe’s institutions agree to write down Greece’s national debt to GDP ratio (175% or so) to Portugal’s levels (130% or so), that’s likely to piss of Portugal, and ignite other anti-austerity movements in Europe.
Davies might also be right that a fiscal union will eventually come in Europe. In fact, I think he probably is. But when? I can’t see it in the next 10 years and as far as I know nobody is projecting that. How many ludicrous surpluses does Greece have to run while it waits for European fiscal federalism to kick in?
Even if Europe’s tortured internal logic won’t allow a major debt reduction and Syriza’s programme results in failure, that still won’t mean they’re wrong! In fact, given Greece’s astonishing economic collapse, standing against that ludicrous system is the responsible thing to do.