Effective Solidarity? Forget it. (2015-01-27)

Last week, the European Central Bank rightly adopted “Quantative Easing” as a way to resolve the continuing Euro-crisis. Last Sunday, the Greek voters clearly favoured the party Syriza. As Jeffrey Sachs wrote in the Guardian of 21 January 2015 (“Let Greece profit from German history”), Syriza  is no anomaly, it is telling the financial and political truth. His article merits to be quoted extensively:


“The overwhelming truth about the Greek debt crisis is that it’s a massive distraction. Greece accounts for a mere 2% of the Eurozone economy and the EU population. This doesn’t mean that Greece should be pushed around, still less pushed out of the Eurozone. It means the very opposite: the crisis should be resolved, and largely on Greece’s terms.

The problem with a currency union is that seeds of doubt can destroy the economic area, if not the common currency. The euro is infected with doubt: will Greece remain? If Greece goes, will Portugal be next? And if they go, why not Spain, Italy, and who knows who else?”

Anybody who does the Greek debt arithmetic (and it sometimes seems that in Berlin nobody actually does) knows that it cannot repay its external debts, now around 170% of GDP, without a level of pain that is simply beyond the tolerance of democratic societies. The left-wing party Syriza is no anomaly; it is telling the financial and political truth in the run-up to Sunday’s elections, however unpleasant that may be to politicians in Berlin and Brussels.

Some Germans today insist that a debt is a debt, and that Greece must repay in full. They should know better from their own history.”[..]” They should recall the relief that Germany was granted through the Marshall plan, and the 1953 London agreement on German debts. Did Germany “deserve” the relief in 1953? That was not the right question. Germany’s new democracy needed the relief, and Germany needed a fresh start. It played a major role in the economic recovery and construction of Germany’s democratic institutions.

We are, thank God, not in any great drama of a post-war settlement. Europe is rich, prosperous, and democratic. Yet French and German banks made too many loans to Greece a decade ago, and Goldman Sachs facilitated accounting legerdemain to hide the rapid build-up of Greece’s sovereign debt. Greece’s private creditors have already taken a deep haircut on the debt. The bigger challenge – and one that could be much more easily solved – is the debt owed to official creditors, sums that are large for Greece but very small for Europe.

Does Greece “deserve” the debt relief? Greek politicians behaved badly; so did German, French, and US banks; and so have many Greek tycoons who hid their wealth abroad, out of reach of the tax authorities.

Who “deserves” what remains a difficult question. Yet as with Germany in 1953, the proper question is whether Greece needs debt relief, and whether Germany and the other creditors should give it. On that the answer is unequivocal. The Eurozone is heading either for a constructive debt-relief agreement or for a political crash with potential ramifications vastly larger than Greece.

The solution would not be difficult technically. Greece’s outstanding external debts should be restructured as very long-term loans at a fixed and low euro-interest rate, say 0.5% for the next five years, rising to 1% in the 2020s and beyond. Rather than pulling exact numbers out of the air, some straightforward debt arithmetic would help to identify a realistic trajectory for Greece’s recovery.

Debt relief will not solve Greece’s economic problems, but it would open the door to a solution”[..]. The first step is to stop the pain.”

The decision taken by the ECB is attached.  The careful reader will find out that the member states of the European Union – Germany and the Netherlands in particular -  clearly fail to live up to Robert Schuman’s first principle of “real solidarity”.


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