Syriza’s victory has injected a ray of clarity into the eurozone’s fog. The Greek people have said “enough is enough”. So, we have a new situation – and an opportunity to do things differently.
The Greek election confirmed what everyone knew but wouldn’t say: most of the Greek government’s external debt of €317bn will never be repaid. It would be best if Europe’s leaders openly acknowledged this and stopped trying to “pretend and extend”. They should convene a European debt relief conference, as Syriza has suggested. This would agree to cancel a percentage of the external debt of all heavily indebted eurozone countries. Italy, Spain, Portugal and possibly Ireland would qualify. The percentage would vary with the amount of the outstanding debt and the economic plight of the different debtors. For Greece, a debt write-off of about 50 per cent, leaving it with a debt/GDP ratio of close to 90 per cent, would give a real chance of a fresh start.
Angela Merkel and the Swabian housewife she claims to represent will be appalled at any such open “breach of contract”. But provided the substance of the breach is accepted, it can be dressed up to look as if no breach has occurred. Bankers are experts in devising suitable instruments for deception. ‘Here is a chance for them to earn their keep. Bonds of varying types can be issued. Some of them will be fictional – ie, give rise to no claims for, say, 20 years. This is as good as cancellation.
The morality of debt forgiveness can be endlessly debated. It will be claimed that it is unjust to the creditor, that it will remove the incentives for the debtor to reform; in the case of Greece, to tackle corruption and non-payment of taxes. This is reasonable. That is why there should not be complete cancellation: enough debtor discomfort should continue to keep up pressure to maintain fiscal discipline.
Yet the outcome will not be decided by such fine apportionment of moral blame. In practice, whether debts are paid in full, paid in part or repudiated depends not just on the size of the debts but on the political clout of the creditor and debtor forces.
Decisive creditor victories have been increasingly rare since military conquest and slavery ceased to be acceptable ways of extracting tribute. Successful debtor revolts have become the norm. Germany, itself the beneficiary of big debt write-offs after the two world wars, would be wise to remember this.
Morality and politics aside, there is a compelling economic argument for debt forgiveness. The huge external debts of countries such as Greece menace the recovery of the eurozone from the Great Recession. They can only be repaid by transferring resources from the debtor to the creditor countries. To do this, the heavily indebted countries will have to run export surpluses of up to 10 per cent or more over several years. (Greece’s current account surplus is under 1 per cent.) No one supposes that they will achieve productivity gains sufficient to make this possible. This means that further large cuts in their living standards will be required to generate the necessary exports.
While foreign creditors can spend the repaid money in the debtor countries, there is no need for them to do so, or even spend it at all. Repaid debts can be used to buy goods from east Asia or to pay down bank debt. Such uses represent a net subtraction from eurozone GDP.
So, any honest attempt to “pay back the debt” will almost certainly create a Europe-wide depression. To avoid this, the IMF and ECB will have to lend the debtor countries more money on condition of more austerity and “structural reform”; and so the debts will pile up, accompanied by ruinous political, economic and financial turmoil, as Europe spirals downwards. What a mad way to run our affairs!
Aren’t we forgetting the benefits promised by quantitative easing (QE)? Mario Draghi of the ECB has just announced a €1.1trn programme of government bond purchases, to be phased over a year and a half, starting in March. But it is naive to see this as a magic bullet.
As John Maynard Keynes warned in 1936: “If . . . we are tempted to assert that money is the drink which stimulates the system to activity, we must remind ourselves that there may be several slips between the cup and the lip.” The recent experiences of monetary infusions in the US and the UK confirm this. Much of the money received from the sale of bonds never got into circulation at all: it went straight into bank reserves. A lot of what was spent went not into GDP-related purchases but into the “financial circulation” – bidding up the prices of existing assets (stock-market securities and houses). As a result, the “bang per buck” delivered by QE was relatively meagre. There is no reason for Draghi to expect anything better – and some reason to expect worse.
A securer form of monetary stimulus would be to give time-limited spending vouchers to the households of all those eurozone countries whose national economies are still below their 2008 level. First proposed by the 19th-century economist Silvio Gesell and endorsed by the American economist Irving Fisher, the “stamped money” experiment has never been tried and is not about to be tested.
So, we are thrown back on public investment. The Juncker plan, about to be approved by the European Parliament, would provide €21bn of European Investment Bank and EU Structural Funds money for approved investment projects, chiefly infrastructure. Its supporters claim that this will leverage €315bn of private investment over three years. As well as increasing aggregate demand, such a supply-side measure would also enhance future growth.
I agree with Syriza: the way back to prosperity and solvency is not debt collection and austerity but debt relief and public investment. This is Europe’s choice.