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Greek Parliament Votes to Keep Greece Locked in its Debt Trap

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of this site. This site does not give financial, investment or medical advice.

Quietly and with none of the public drama of the first half of 2015 Greece is slipping back into crisis.

The cause of the crisis is the same as always.

Greece is bankrupt.  During the property and credit boom that led up to the 2008 crisis it took on far more debt than it could pay.  However instead of being allowed to default or to agree an IMF monitored restructuring with its creditors, Greece in order to remain in the eurozone borrowed more money from the EU’s institutions to pay its debts, which were only partly reduced.  As a condition for this lending the EU institutions – led by German Chancellor Merkel who organised the original bailout – insisted Greece impose harsh austerity on itself so that it could achieve the budget surplus needed to repay the extra debt.

As at the great majority of economists who looked at this situation predicted, this austerity led directly to a collapse in investment and demand as both were strangled by a host of new taxes and benefit cuts insisted upon by Merkel and Greece’s EU creditors.  These have caused the economy to spiral down into recession, with Greece’s euro membership allowing for no countervailing relief such as might have been provided by depreciating the currency. 

The recession has in turn cut tax receipts whilst increasing spending by more than the EU institutions allowed for, causing Greece to miss its budget targets.  That in turn has meant that Greece regularly finds itself with insufficient money to pay the creditor institutions – the EU and the IMF – the instalments it owes on its existing loans. 

Greece has accordingly been forced to turn repeatedly to its institutional creditors – the EU and the IMF – to ask for more money.  After fraught negotiations the money – or enough of it to enable Greece to get through the immediate crisis – is provided.  However Greece is obliged in return to agree to yet more austerity, causing the whole process to repeat itself. 

In the meantime, as the economy contracts and the lending increases, the debt burden on the country grows greater.

This is the cycle Greece has been trapped in ever since it negotiated its first bailout in 2009.

Its causes are twofold: the refusal of its EU creditors led by Germany’s incompetent Chancellor Angela Merkel to allow Greece any debt relief whilst it remains in the eurozone – resulting in impossible demands being made of the country – and the corresponding refusal of the Greek elite – backed by the most vocal part of the Greek population – to consider any alternative to remaining in the eurozone despite the impossibly harsh austerity this is imposing on the country. 

Disastrously, instead of either party rethinking its approach in light of the repeated failure, they simply blame each other, with the Germans and the EU criticising the shiftless Greeks and the Greeks complaining the Germans and the EU have let them down by refusing to pay for them to remain in the eurozone.

Though this cycle has repeated itself continuously since 2009, it appeared to come close to breaking last year after the election of the radical leftist Syriza government. 


For a few fraught months it seemed as if Syriza, led by its Prime Minister Alexis Tsipras and his finance minister Yanis Varoufakis, was prepared to break the cycle. 

Varoufakis very publicly challenged the entire economic logic of a strategy that had obviously failed  and which was causing severe hardship in Greece.  His over-confident theatrical personality, his unorthodox negotiating tactics, and his habit of telling his EU colleagues to their faces things they didn’t want to hear, however simply managed to turn the EU leaders against him despite the obvious truth of much of what he was saying.

Eventually the EU’s most powerful finance minister, Germany’s Wolfgang Schauble, proposed that Greece exit the eurozone so that it could sort itself out outside it. This would have come with a debt holiday and a 50 billion euro sweetener to help Greece ride out the storm that would have resulted.

Despite a referendum result in Greece that seemed to give Tsipras and Varoufakis the political cover they needed, it turned out that Tsipras was as committed to Greece’s euro membership as the rest of Greece’s elite. 

Instead of embracing Schauble’s proposal he rejected it, accepting yet another bailout brokered by Italy and France, which kept Greece in the eurozone but which came with more commitments to yet more austerity.

The cycle that Greece has been trapped in since the first bailout in 2009 therefore was simply perpetuated.

What was extraordinary about this last bailout which Tsipras agreed to last summer was that – as I and many others said at the time – it was even more detached from reality than all the others.    Its demands and its targets are so obviously unachievable – making it only a question of time before it unravels – that even one of the creditor institutions that is supposed to be supporting the bailout – the IMF – has publicly said it has no belief in it.  It is calling for Greece to be granted the debt relief the EU refuses to grant it and says the primary budget surplus target the bailout requires Greece to achieve should be reduced to more realistic levels. 

These are essentially the same demands Varoufakis was making last year, which the EU leaders led by Merkel and Schauble summarily rejected.  Latest indications are they reject them still.

This explains the situation in Greece now.  The looming crisis point is July when Greece has to pay debt instalments of more than $3 billion.  It lacks the money to do this and is therefore obliged to enact more legislation increasing taxes and cutting pensions in order to get more bailout funding released.

On Sunday after a heated debate that is what the Greek parliament agreed to do. 

It did so in a way that shows the levels of absurdity and cynicism to which Greek politics have sunk. 

Tsipras – once the champion of the Greek left, elected just over a year ago to end austerity – supported measures that will deepen the austerity. 

His opponents in the fervidly pro-EU conservative New Democracy party opposed him in the parliament though the measures he proposed perpetuate an austerity they supported when in government and which is demanded by the EU, which they support.

Greece’s fundamental problem – and Europe’s – is that there is no obvious way out of this crisis. 

At a time when German politicians are criticising the European Central Bank for its loose monetary policies and are even blaming it for causing the rise of the anti-immigrant AfD, any proposal to write off Greek debt or to soften the demands on Greece – as demanded by the IMF – would be guaranteed to provoke uproar in Germany.  It is doubtful that Chancellor Merkel – her political position weakened by the migrant crisis – could persuade her CDU party to agree to it. Her CSU coalition partner would almost certainly oppose it.

In Greece meanwhile – though opinion polls show support for the country’s euro membership to have sunk to unprecedentedly low levels – since Tsipras’s 2015 U turn no viable political force prepared to challenge the orthodoxy by contemplating a euro exit exists.  An attempt by a breakaway group of former Syriza insiders led by former parliamentary speaker Zoe Konstantopoulou and former energy minister Panagiotis Lafazanis to create such a force has ended in a split.  It is not yet clear whether in the event of new elections any of the politicians involved in this group would gain election to the parliament, and even if they did they would only be a small minority of the parliament with little influence.

Despite angry protests in Greece and the growing disillusion of the IMF the endless nightmare that is the Greek crisis therefore seems set to continue.


The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of this site. This site does not give financial, investment or medical advice.

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