March 17, 2015—If a poll published last week by the German broadcaster ZDF gives any indication, just more than half of Germans no longer want Greece to be part of the 19-country eurozone. This is up from a month earlier and reflects a sentiment, as Bloomberg News reported, that the debtor Greeks aren’t “behaving seriously.”
More on that judgment later.
Officially, Germany wants to keep Greece in the euro and demands that Greece continue to accept existing austerity policies to reduce government spending as a condition for extended debt relief. Greece, which elected a new government in January on the Syriza party’s antiausterity platform, has proposed to change the terms.
Political economist Mark Blyth, who spoke to economists and other analysts at Nathan Associates on March 16, says it’s possible to imagine that Germany, Greece’s largest creditor, could live with a grexit—Greece’s exit from the single currency.
In a “slow motion bank robbery,” Greece would begin by accepting the budget surplus requirement—already attained—for as much as €500 to €600 million (US$530 million to $637 million) in emergency assistance to Greek banks from the European Central Bank. Greece would quietly print a new drachma, the national currency, as Germany looked the other way. At some point, Greece would shut its banks to make the transition to a new currency, paying international bills with the euros during that “bank holiday.”
Greece would later redenominate its debt, which would be cheaper to pay off than in euros. While improving tax collections to enforce fiscal discipline, Greece would also default as Argentina did in 2001, but have sound policies in place to take advantage of the growth that default unleashed. Greece could still remain in the European Union, and receive support from the United States as well the International Monetary Fund to block Russian influence.
What do the Germans get from this? “A fiscally tight but growing Eurozone,” said Blyth, Brown University’s Eastman professor of political economy and author of Austerity: The History of a Dangerous Idea (Oxford University Press 2013). The round of quantitative easing, or bond buying, that the ECB embarked on March 9 to the tune of €60 billion ($64 million) a month, the “Juncker plan” for pumping investment into the European economy, and low oil prices could supply the growth part.
Blyth offers a “pessimistic view” of 2015 as well in which Greece, which “is insolvent,” rejects “debt-servitude” and reacts to external pressures by becoming even more populist than it already is, setting an example for other periphery Eurozone members like Italy, Portugal, and Spain. Banks in the eurozone hold €1.2 trillion ($1.27 trillion) in bad loans “in an environment of low growth,” with double-digit unemployment “almost everywhere except Germany,” aging and emigrating populations, and expectations that prices will keep falling—a disincentive to spend at current prices.
Blyth’s discussion of the current situation, which is coming to a head as Greece could run out of cash this month, follows his general critique of austerity as a response to what has been mislabeled as a “sovereign debt crisis.” In reality, the debt crisis is “a slow motion banking crisis” with multiple origins dating to the adoption of the euro itself and including how European banks rely more heavily than U.S. banks on the short-term sale and repurchase of assets to obtain funds.
European policymakers, after initial responses to a credit squeeze that began in 2008, started focusing on public sector spending in 2010, with demands for budget-tightening. Austerity brought about a “continual contraction” because austerity increased the debt-to-GDP ratio. As Blyth put it simply, “austerity shrinks GDP and makes debts bigger.”
The ECB’s measures in 2011 and 2012 known as longer-term refinancing operations (LTRO) enabled banks to put money into the economy through debt purchases. But the contraction was so severe that the results were muted. There was too little growth and too little accompanying inflation to whittle down the debt.
Despite all the “tough talk and slapping down the populists at the moment,” enough Germans “recognize that this is a banking crisis and continual contraction isn’t working,” Blyth said in a paper he presented along with giving his talk.
But the crisis has fed dangerous stereotypes of debtor nations and creditor nations “as if being a debtor or creditor is a national characteristic.” Data on national debt show that the “notion of saints in the north and sinners to the south doesn’t exactly map out.”