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February 9, 2015

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Home » Opinion » Foreign Views

Greece provides chance for redemption to eurozone

By Joseph E. Stiglitz | February 9, 2015, Monday | Print Edition

WHEN the euro crisis began a half-decade ago, Keynesian economists predicted that the austerity that was being imposed on Greece and the other crisis countries would fail. It would stifle growth and increase unemployment, and even fail to decrease the debt-to-GDP ratio.

We hardly needed another test. Austerity had failed repeatedly, from its early use under US President Herbert Hoover, which turned the stock-market crash into the Great Depression, to the IMF “programs” imposed on East Asia and Latin America in recent decades. And yet when Greece got into trouble, it was tried again.

Greece largely succeeded in following the dictate set by the “troika” (the European Commission, the ECB, and the IMF): It converted a primary budget deficit into a primary surplus.

But the contraction in government spending has been predictably devastating: 25 percent unemployment, a 22 percent fall in GDP since 2009, and a 35 percent increase in the debt-to-GDP ratio. And now, with the anti-austerity Syriza Party’s overwhelming election victory, Greek voters have declared that they have had enough.

So what is to be done? First, let us be clear: Greece could be blamed for its troubles if it were the only country where the troika’s medicine failed miserably. But Spain had a surplus and a low debt ratio before the crisis, and it, too, is in depression. What is needed is not structural reform within Greece and Spain so much as structural reform of the eurozone’s design and a fundamental rethinking of the policy frameworks that have resulted in the monetary union’s spectacularly bad performance.

Greece has also once again reminded us of how badly the world needs a debt-restructuring framework. Excessive debt caused not only the 2008 crisis, but also the East Asia crisis in the 1990s and the Latin American crisis in the 1980s. It continues to cause untold suffering in the US, where millions of homeowners have lost their homes, and is now threatening millions more in Poland and elsewhere who took out loans in Swiss francs.

Given the amount of distress brought about by excessive debt, one might well ask why individuals and countries have repeatedly put themselves into this situation. After all, such debts are contracts, so creditors are just as responsible for them as debtors. In fact, creditors arguably are more responsible: typically, they are sophisticated financial institutions, whereas borrowers frequently are far less attuned to market vicissitudes and the risks associated with different contractual arrangements. Indeed, we know that US banks actually preyed on their borrowers.

Debtors’ prisons

Every (advanced) country has realized that making capitalism work requires giving individuals a fresh start. The debtors’ prisons of the 19th century were a failure — inhumane and not exactly helping to ensure repayment. What did help was to provide better incentives for good lending by making creditors more responsible for the consequences of their decisions.

At the international level, we have not yet created an orderly process for giving countries a fresh start. Since before the 2008 crisis, the United Nations, with the support of almost all of the developing and emerging countries, has been seeking to create such a framework.

Sheer nonsense

But the US has been adamantly opposed; perhaps it wants to reinstitute debtor prisons for over-indebted countries’ officials (if so, space may be opening up at Guantanamo Bay).

The idea of bringing back debtors’ prisons may seem far-fetched, but it resonates with current talk of moral hazard and accountability. There is a fear that if Greece is allowed to restructure its debt, it will simply get itself into trouble again, as will others.

This is sheer nonsense. Does anyone in their right mind think that any country would willingly put itself through what Greece has gone through, just to get a free ride from its creditors? If there is a moral hazard, it is on the part of the lenders — especially in the private sector — who have been bailed out repeatedly.

If Europe has allowed these debts to move from the private sector to the public sector — a well-established pattern over the past half-century — it is Europe, not Greece, that should bear the consequences. Greece’s current plight, including the massive run-up in the debt ratio, is largely the fault of the misguided troika programs foisted on it.

So it is not debt restructuring, but its absence, that is “immoral.” There is nothing particularly special about the dilemmas that Greece faces today; many countries have been in the same position. What makes Greece’s problems more difficult to address is the structure of the eurozone: Monetary union implies that member states cannot devalue their way out of trouble, yet the modicum of European solidarity that must accompany this loss of policy flexibility simply is not there.

 

Joseph E. Stiglitz, a Nobel laureate in economics. Copyright: Project Syndicate 1995-2015. Shanghai Daily condensed the article.

Foreign Views


 

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