The Never-Ending Greek Crisis and the Euro’s Inner Logic
22 juin 2015
A relatively new period for the Eurozone appeared to be emerging in mid-2012 when, on top of Mario Draghi’s pledge not to let the currency union fall apart, the area’s main political leaders started to grow increasingly sceptical of austerity policies as a means to rein in deficits and surging public debts. At the time, not only was more political room left for national governments in so-called peripheral countries such as Spain to mitigate the impact of deficit reduction in the face of their economic challenges, but a new approach also seemed to arise progressively in managing the debt overhang. The Irish government’s bold decision to restructure its €28 billion mountain of so-called promissory notes in February 2013  could have been a milestone in the emergence of a more reasonable approach to economic and financial policy-making in the Eurozone. Quite surprisingly, this crucial event, which allowed Ireland’s full return to capital markets, has fallen into oblivion. Although the economic issues at stake in Greece and in Ireland differ significantly, the contrasting treatments of these two countries’ debt issues in the second stage of the crisis can help us understand the euro’s true political logic.
Those, in creditor countries, who advocate a hard line towards Greece, are often right in their criticism of the country’s failing tax collection system, ineffective administration and poorly implemented rule of law. Meanwhile, it is surprising that their stance does not lead them to opt for a long-term fix rather than the controversial and counterproductive austerity conditions that have taken centre stage in all the bailout programmes. Since the onset of the global crisis, Greece has lost a quarter of its annual economic output – the key reason why the country is unable to service its huge pile of public debt, which now tops 175 percent of GDP. Virtually no one among Eurozone leaders truly believes that the Greek economy might turn a corner without some further degree of debt restructuring. Back in November 2012, they even pledged to reward Greece with a significant level of debt relief (on the vast portion of debt owed to the European rescue funds and to national governments) should it be able to achieve a primary surplus. Although Greece did meet that challenging requirement last year, the relief promise has not materialised and has so far remained absent from the creditors’ official agenda.
The difficulties that affect crisis management policies still surprise by their scale, seven years after the onset of the crisis. While abstaining from putting too much blame on any particular country or individual, it is crucial to grasp the political-economic logic behind the apparent inconsistencies that typify the Eurozone’s political scene. Economic doctrines (notably German “ordoliberalism” and France’s overall deference to it) and the emphasis on moral notions related to sin and redemption tend to hide more serious political-economic issues. A comprehensive economic plan would prove far more relevant to the stabilisation of the Eurozone than the heated moral debates over a country that accounts for less than 2 percent of Eurozone output. The focus on the unrealistic technicalities of bailout plans, which consist in kicking the can down the road rather than trying to fix Greece’s economic flaws, and the fierce debates that go with it, actually seem to have little to do with the country itself.
Given that Greece has been allowed to join the euro for mainly political reasons, has its economic situation truly grown unmanageable for Eurozone leaders or is there a deeper political meaning to their resort to coercion and brinkmanship? Private institutions currently hold a mere 17 percent of Greece’s public debt while Eurozone governments hold as much as 62 percent of it (mainly through bailout funds), the IMF 10 percent and the ECB another 8 percent . It is clear from these figures that the drama around Greece’s repayments echoes political issues rather than purely financial ones. In the past, Eurozone governments did reduce Greece’s debt burden through interest rate cuts and maturity extension. The latest fuss is related to the 18 percent owed to the IMF and the ECB. Eurozone governments have already injected huge sums into the Greek budget, which have close to no chance of being repaid as planned. With markets now accounting for such a small share of Greece’s debt, the traditional distinction between illiquidity and insolvency has lost in relevance. Subsequently, there is no other sensible reason for creditor countries to dramatise IMF and ECB repayments but to exert pressure on the Syriza government. It is quite natural that creditor countries resort to that sort of political manoeuvre in order to impose new adjustment measures upon Alexis Tsipras. However, the imposition of mostly quantitative criteria, which have already proved inefficient and harmful, remains puzzling. Instead of the unrealistically precise targets in terms of the primary surplus, creditors should only demand that the Greek government truly commit to reforming public administration in-depth and strengthening tax collection. The failure to focus negotiations on relevant issues has inevitably led to a fierce war of words between two opposing kinds of populism.
It is clear from the Irish experience that tricky debt repayments related to bailout programmes should not create so much turmoil. The broad difference in the recent treatment of the two countries stems from the outrage sparked by the financial shock therapy that was imposed on Ireland in the first stage of the crisis. The €64 billion cost of the banking sector’s bailout was directly financed by the Irish taxpayer – through a fiscal deficit of 32.4 percent of GDP in 2010. Eurozone authorities, first and foremost the ECB, decided to spare Europe’s financial institutions hefty losses by compelling the Irish government to take full responsibility for its ailing banking sector. While this approach aimed at preventing contagion across the financial system, it actually triggered the Eurozone sovereign debt crisis, as it created an explicit, full and direct financial linkage between Eurozone national governments and their banking sectors. In order for the Irish public to swallow the pill, Ireland was progressively heralded the Eurozone’s poster child and eventually allowed to restructure a portion of its debt discreetly. The same carrot and stick approach has then been applied to Portugal and Spain, to a lesser extent. This absolution narrative has unfortunately fuelled the dismal dichotomy between allegedly virtuous and sinful peripheral countries – which has taken on an unhealthy proportion in the German mass media. This trend is echoed by Wolfgang Schäuble’s tough approach, while Angela Merkel is progressively shifting to a more conciliatory stance.
The Eurozone is implicitly following a hierarchical logic by which countries are appraised depending on their acceptance of adjustment measures – whatever their economic rationale. Meanwhile, Eurozone politicians have grown aware of the many flaws of the bailout programmes. It is thus puzzling that the same shock therapies are being imposed unaltered. In various ways, we are witnessing the emergence of a political order, whose founding moral principles seem to be surprisingly unconcerned with economic development and stability for Europe as a whole. Despite overblown talk of an ongoing recovery, this system tends to preclude any long-term solution to the debt crisis. Ordoliberal principles have rightly emerged in the aftermath of the Second World War to accompany Germany’s reconstruction along a stable path – not to govern a very diverse and poorly designed currency union. The mismatch between these ideal rules and the actual Eurozone has created a labyrinthine system, which, from a certain perspective, is at odds with the pragmatic principles of economic and political liberalism.
 Promissory notes are primitive debt instruments, typically issued under strained financial conditions. The Irish government replaced the ones it issued in 2010 with regular government bonds with maturities of up to forty years. Prior to the restructuring, the €3.1 billion annual cost (in interest and principal repayment) of these promissory notes was equivalent to the target of the government’s austerity programme. See: “Dublin Hails ‘Historic’ Debt Restructure”, Financial Times, 7 February 2013
The Central Bank of Greece holds the remaining 3% (as assets and repurchase agreements). Source: “Who’s Hurt Most if Greece Defaults?”, Bloomberg, 7 January 2015