Europe / Greek Debt

The Politics of Public Debt

Greece’s entry into the Eurozone in 2001 was heralded as a victory for the European community. The creation of the euro represented the culmination of post-war European cooperation, and an expansion to Greece proved that that Europe’s goal of centralized economic planning could be successfully exported. For Greeks as well membership in the Eurozone cemented their place as a “mature” economy. The high interest rates and crushing debt that plagued the Greek economy only a decade before must have seemed like a distant memory. Impressive 4% growth throughout the 90s brought the country’s economy in-line with the rest of the European Union and justified admission into the monetary union. A common currency and German planning— it was thought— would ensure growth and economic security for generations of Greeks to come.

Today, to say that this turn-of-the-millennium optimism for cooperation needs to be reevaluated would be a severe understatement. The 2008 financial crisis and subsequent recession have threatened the very bonds that hold the Eurozone together—a tension that has dissipated little six years later. Nowhere have these strains produced more conflict than Greece, where, 25 years later, Greeks are questioning their decision to adopt the euro.

The economic situation in Greece is dire. A mountain of debt that had piled up before the 2008 crisis exacerbated the effects of recession. Devaluation of Greek long-term loans to junk bond status deprived the Greek government of the capital it needed to sustain an unbalanced budget. Tourism rates—essential to its service-based economy— dropped through the floor in the wake of worldwide recession, and, along with it, government revenues.

In 2010, the German government decided intervention was necessary to preserve the Eurozone. A German-led coalition consisting of the European Commission, the European Central Bank (ECB), and the International Monetary Fund (nicknamed “Troika”) offered Greece a €110 billion bailout loan —with strings attached. Upon accepting the loan, Greece would be required to balance its budget through a policy of austerity. A departure from the Keynesian model of increasing government expenditure in order to account for decreased private investment during a recession, German austerity advocated cutting public sector jobs and gutting public welfare in an aggressive attempt to slash the budget.

Though ECB officials would likely disagree, there can be no doubt that Greeks have widely declared austerity a failed policy. The current unemployment rate sits at over 26%, while youth unemployment is at a frightening 60%. Long-term unemployment is somehow even more shocking— 900,000 of the 1.3 million unemployed Greeks haven’t received a paycheck in over two years. The forced sale of public assets proved less profitable than first estimated, and the paralyzed welfare system left the government incapable of ensuring the unemployed. The most damning argument against continued austerity, however, is the 25% contraction of GDP since the beginning of the crisis.

Unsurprisingly, Greeks condemned German interference, with some likening cooperation among government officials to “collaboration.” In the 2012 general elections, public opinion could already be seen shifting against austerity. The Syriza party, a radical left-wing socialist group, was voted in as the central opposition party to the New Democracy “collaborators.” Running on reversing austerity, increased public spending, and an extensive debt-forgiveness program, Syriza’s growing popularity drew on widespread economic dissatisfaction. The party’s Eurocommunist roots and common lineage with the Communist Party of Greece (KKE) gave it credibility among the intelligentsia and working class, respectively.

Since the 2012 elections, Syriza has made a sweeping rise to power. When parliament failed to elect a president in late December of last year, special elections placed Syriza in power with an effective public mandate, voting them into two seats short of an absolute majority. Within days, Syriza formed an unlikely coalition with the far-right Independent Greeks, and Greece’s youngest prime minister since 1865, Alexis Tsipras, assumed office in Athens.

The first issue for the new coalition government has been addressing the terms of the Troika loan. At one time, it appeared that Mr. Tsipras and his colleagues could favor a “Grexit,” or departure from the euro altogether, a move that would almost certainly coincide with a loan default. In an effort to assure voters before the most recent elections, however, the party signaled it would be more open to negotiations than previously thought. Nonetheless, Mr. Tsipras has been steadfast in demanding debt-forgiveness. Germany understandably stands in opposition; it’s tax-payer money financing the loans, after all. But a renegotiation is all but inevitable as Mr. Tsipras digs in his heels.

Whether the loan is refinanced or not (and it will be), the recent elections will bring an end to austerity in Greece for the time being. The European Community’s power to enforce contracts under the authority of the Maastricht Treaty has already been contested by economic powers less influential than Greece—see Sweden’s abstention from adopting the euro in 2003. Perhaps more importantly, though, Mr. Tsipras has built his reputation on an unwillingness to budge against German bureaucrats.

This resistance to Brussels and Frankfurt has not gone unnoticed around the rest of the European community. In Spain, the left-wing Podemos party—which has surged in popularity over the past year to become Spain’s second largest party—celebrated with demonstrations supporting the choice of Greek citizens. Podemos seeks an overhaul of austerity and more independence from European authority in Brussels as well. Pablo Iglesias, leader of Podemos, sought to draw a comparison of what was to come in Spain. “The victory of Syriza will provoke something new in the political panorama of Greece – they’re going to have a real Greek president. Not a delegate of Angela Merkel whose interests will rank above those of the country and its people,” he told the news channel La Sexta.

Slow economic recovery with prescribed German remedies has prompted defection from central banking across Europe. If it was ever in question, it is now clear that the Mediterranean economies of Portugal, Spain, Italy, and Greece are a far cry from the powerhouse economies of Germany and even France. If the powers of Europe hope to one day expand the euro to a post-communist Bulgaria or Romania, they must not let Greece leave. Greek secession could upset the fragile continental economy, and growing nationalist politics across Europe could lead a push for the dissolution of the Eurozone altogether.

Luckily, a Grexit is extremely unlikely. Germany, however, must show a willingness to re-examine the terms of its deal to Greece. Perhaps if Troika officials accept that previous deals were made with unrealistic expectations, renegotiation can be justified by fault on both sides. Citizens in both countries, though, seem ready for reconciliation. Three-quarters of Greeks support staying in the Eurozone “at all costs.” Germans share the sentiment; a majority support keeping Greece in the Eurozone. Public opinion reflects a common realization in a post-recession world: cooperation is essential. An economic stalemate could prove fatal for a teetering Europe.