Resolving the Greek Debt Crisis: Why Addressing Debt is Key

Optimists hope that Greece will soon be able to put its crisis behind it following the latest meeting of eurozone finance ministers. The optimism is not unfounded. Key lenders like the IMF and the European Commission have stopped pretending that Greek debt is sustainable. More importantly, the obvious is at last recognised – that Greece cannot exit its debt crisis until the very problem of its debt is addressed.

Yet economic sense has been largely irrelevant in the unfolding of the Greek drama. Following a typical pattern in the history of debt crises, it is a tale that has been predominantly framed and managed in terms of morality.

For example, Wolfgang Schäuble, Germany’s finance minister, insists that he cannot support Greece’s claim for relief because he lacks “a proper argument for the German lawmaker and the German public”. The truth is that there are overwhelming economic arguments for debt relief, including the fact that the current plan is self-defeating. The requirement that Greece generates massive budget surpluses will only accelerate the death spiral of the Greek economy, inevitably deteriorating its debt-servicing capacity.

But it is vain to fight with economic reason, when the problem is, among other things, profoundly governed by moral sentiments. An important issue when it comes to resolving the crisis is whether the Greek population – which has been systematically morally downgraded – deserves debt relief.

The underlying moral struggle and associated political impasse was recently captured in a New York Times editorial:

According to the dominant narrative that has shaped public imagination, Greeks have been repeatedly rescued in order to maintain a profligate lifestyle. Against this backdrop, it is understandable that the prospect of debt relief is resisted on moral grounds.

But the underpinning story is flawed.

False logic

The root cause of Greece’s fiscal problem was public expenditure on a bloated and dysfunctional public sector, structurally designed to service political clientelism – not the Greek citizen. Greek cronyism was in turn heavily fed by profit-seeking institutions. They recklessly bought debt from the eurozone periphery that was back then treated as risk-free.

But investors had underestimated how the waves triggered by the 2008 global financial crisis would affect the poorly designed European monetary union. It was an accident waiting to happen and was first felt in Greece in 2010 when it became increasingly evident that Greek bonds could not be paid in full.

Shockingly enough, the solution was neither to have investors shoulder the consequences of their bad bets, nor to drastically fight the budgetary cause of the Greek deficit. Defying even the IMF rulebook, Europe’s political elites decided to keep both a dysfunctional state and an unsustainable sovereign debt in place. This was possible by financing Greek clientelism; but more importantly (and disproportionately), by bailing out private investors – especially French and German banks.

Of course, what was essentially a reimbursement of imprudent buyers of public debt has been deceptively depicted as a lofty act of European solidarity towards the Greek population. Greeks supposedly received money that could be fully repaid in due course. Likewise, Greek politicians equally misleadingly portrayed bailouts as “success stories” helping Greece from going bankrupt.

By not dealing with the essence of the debt crisis, the 2012 and 2015 bailouts were unavoidable in order to refinance an unpayable debt and recapitalise Greek banks (that were since suffering the side-effects of disastrous crisis management). And while the early bailout of debt was described as a bailout of Greeks, the subsequent rolling over of the debt is even more misleadingly portrayed as an endless influx of desperately-needed injections of cash.

Moreover, the conditions imposed on Greece in return for supposedly generous help had little to do with economics. Greece undoubtedly stands in needs of structural reforms (necessary for the modernisation of the Greek state – not the resolution of the debt crisis). But the “reforms” demanded from Greece are mostly a mix of destructive austerity and punitive policies. They might be best understood as moral reforms of the sort commanded by a Calvinist ethic.

Predictably enough, not allowing Greece to sustainably restructure its debts on the one hand, while imposing unreasonable “bailout conditions” on the other, marked the greatest economic collapse in modern times. All the while Greece is again blamed for failing to recover.

Reshaping our moral imagination

In moving beyond a false morality tale, it is high time we start appreciating that recovery is not possible precisely because of the bailout programmes – not in spite of them. In so doing, we must restructure the way the crisis is framed, since the very words we use nurture an irresistible inclination to blame Greece for not achieving what successive “rescue aids” and “reforms” actually render impossible.

The associated fallacy that Greece is paying for its own fiscal sins must also be put to bed. This was mostly true until 2010. But if punitive economics could be somehow justifiable in the offset of the crisis, they have since become root causes of the current state of the Greek economy. German leadership cannot for much longer afford to claim a higher moral ground and put the blame squarely on Greece – let alone pretend to be the saviour of an ungrateful and defiant population.

I do not even go so far as to contend that Greece deserves debt relief on moral grounds. What I more moderately maintain is that the debt problem is unlikely to be resolved soon due to a moral imagination that has been misguided by the toxic belief that Greece has repeatedly received generous help, and is still suffering for its original fiscal sins. As an antidote, we need to disarm the vindictive morality tale that has been deceptively constructed and allow economic sense to take center stage.