By Paul De Grauwe
The Greek debt crisis that erupted in 2010 is back, and again threatens the stability of the eurozone.
That crisis was the result of two factors. First, an unbridled spending drift of both the private and the public sectors in Greece during the boom years of 2000-2010, which led to unsustainable large levels of debt.
Second, reckless lending to Greece by northern eurozone banks. At no time did the northern bankers asked themselves whether the Greeks would repay the loans.
The European Union chose to resolve the debt crisis by punishing the Greeks and by saving the northern banks.
A punitive austerity program was imposed on Greece, the effects of which are now visible all over the country: a decline in GDP of close to 25 per cent since 2010; a rise in unemployment to a level we have not seen since the 1930s; and the impoverishment of large parts of the Greek population.
The banks went largely unpunished. True, there was a debt restructuring of the Greek debt held by private investors.
Some banks paid the price of excessive credit granted to Greece, but most banks escaped this fate by dumping their Greek claims onto the public sector.
Those claims are now in the hands of national governments and the European Central Bank. And they want their money back – regardless of the consequences for the Greek people and the Greek political system.
Inevitable? Yes, of course, if the intention is to safeguard the interests of the creditors then there is indeed only one possibility: the Greeks had to pay the full price.But will it pay off in the end? Yes, of course if austerity is maintained long enough it will succeed in creating surpluses and transfers of resources from Greece towards the rich north of the eurozone.
This narrative, however, loses sight of the political upheavals triggered by the human misery that results from intense austerity.
The millions of people who are pushed into misery by the creditors from the north of Europe are not passive subjects.
They not only protest in the streets, something the creditors can easily live with. They also vote for the political parties that promise them a better way to deal with the problem. And these are the parties that are out to break the established political and social order.
Living in a cocoon
It is appalling to see that the European political elite has been living in a cocoon, failing to take into account the political and social implications of the intense austerity programs they imposed in countries like Greece.
This political elite still has not learned the lessons. The first reaction of the German minister of finance after the announcement of new elections in Greece was that the discipline needed to be continued rigorously.
What is to be done? Much will depend on the election results in Greece.
The far-left party, Syriza, seeks to weaken the intensity of the austerity programs and to negotiate a debt restructuring with the European authorities.
It is quite surprising to find out that these demands, in fact, are based on a correct analysis of the Greek problem. Despite the austerity, that has been extraordinarily intense, the Greek public debt has increased and now exceeds 170 per cent of GDP.
Instead of denying this reality, EU finance ministers should start facing it.
They should begin to think about how they can ease the debt burden of Greece.
Denying this reality condemns Greece to many more years of misery and will encourage extremist political movements in the country even further.
The risk today is that the political leaders of the Eurozone refuse to relieve the Greek debt (and that of other countries of the periphery).
In that case, a fundamental crisis in the Eurozone is inevitable. Even if Syriza does not make it at the coming election, extremist parties will gain the upper hand in future elections. This will be very disruptive for the Eurozone as a whole.
History teaches us that after a debt crisis a balance must be found between the interests of creditors and debtors.
The unilateral approach that has been taken in the Eurozone in which the debtors have been forced to bear the full weight of the adjustment almost always leads to a revolt of these debtors.
That is now underway in Greece. It can only be stopped if creditors dare to face this reality.
This article was first published on Paul De Grauwe’s Ivory Towers blog.