In the End, Greece's War on Debt Is A Morality Problem
How can a country which accepted billions of dollars in loans think it’s acceptable not to pay it back? Simplistic as it sounds, the Greek conundrum stems from denying the basic principle that you can only spend what you earn.
Greece may have just reached another bailout agreement with Europe, but the defiance of last Sunday remains -- 61% of Greeks voted against a plan upon which their government had already agreed. They voted against paying their debt. The agreement this week forces more government cutbacks, and will likely prolong the rage of many Greeks who oppose the necessary reforms brought on by indebtedness.
How We Got Here
Greece has struggled with high debt, high unemployment, and political turmoil since 2009. In the early years of the euro (2001-2008), Greece borrowed heavily to build up infrastructure -- think the 2004 Summer Olympic Games -- but its economy nearly tripled at the same time. Yet after the financial crisis of 2008-2009, the growth stopped -- but the borrowing continued.
In 2010, the government realized it needed to cut back, and introduced the much-maligned austerity-cutting salaries for government workers. Later that year, the European Union (EU), European Central Bank (ECB), and International Monetary Fund (IMF) agreed to a €110 billion bailout over three years. In 2012, a second bailout deal increased the total to €246 billion by 2016 -- 135% of Greece’s 2013 gross domestic product (GDP). A third bailout is forthcoming.
After seven large government cutbacks between 2010 and 2013, Greece finally took in more money than it paid out, reaching a budget surplus of 1.5% for the 2013 financial year.
The political strain proved too much, however. Between 2014 and 2015, the far-left Syriza Party gained control in numerous elections. The sporadic revolts and violent opposition to government cutbacks had empowered a political movement which favored the same government largesse and deficits which put Greece in the hole in the first place.
The “Nazi” Angela Merkel
Greece is deeply in debt, and Germany holds the IOUs. German Prime Minister Angela Merkel has insisted that Greece pay back its creditors and keep its promise to enact further government cutbacks. Incensed Greeks responded with, well, graffiti, giving Merkel a Hitler moustache, and comparing their creditors to the Nazi occupation which starved 300,000 Greeks in World War II.
Prominent Keynesian economist Thomas Piketty gives an intellectual veneer to this anti-German backlash. He tells Merkel to remember 1953, when numerous Western powers -- Greece included -- restructured West Germany’s debt, cutting it by 50%. Germany is hypocritical to demand Greece’s repayment and cutbacks when Greece did not demand such terms in the 1950s, Piketty argues.
As Business Insider’s Mike Bird notes, this argument proves utterly baseless. While Germany’s situation in 1945 was comparable to Greece’s today -- Germany’s debt was over 200% of its GDP then, Greece’s is 177% of its GDP now -- by 1953 the situation was far different.
In 1948, Germany reformed its currency -- wiping out approximately 90% of Germany’s cash holdings and deposits. This austerity makes Greece’s recent reforms look like a cakewalk, but it worked.