Post originally appeared on the Cyprus Mail.
“The Greek government would be well-advised to act quickly – for the Greek banks, it is five minutes to midnight,” said Andreas Dombret, an executive board member of the German central bank, last weekend. And everybody whose memory extends back a few years goes: “That again? Somebody has been saying that every three months or so since 2010. Why should we believe it this time?”
The answer is that you probably shouldn’t. The ability of the European Union to dodge the issue and kick the can down the road another few months is unparallelled. But it’s the wrong question. The right one is: why is this crisis still going on five years after it began?
Normally, when a country spends itself into near-bankruptcy like Greece did, the whole cycle of crisis, default (or a tough International Monetary Fund bail-out), and recovery takes much less time than that. Whereas there’s still no end in sight for Greece, although its economy has shrunk by a quarter since 2010. But then, Greece is not a normal country. It’s a member of the European Union.
When an independent country runs out of money to pay its debts and cannot borrow any more, it has normally has two options. One is to make a deal with the IMF: in return for IMF loans to tide it over, the government promises to restructure the economy (stop subsidising favoured groups and businesses), balance the budget (collect more taxes and cut spending) and, above all, devalue the currency.
Greece has done all of that – except that it cannot devalue its currency, because it does not control it. It is locked into membership of the pan-European currency, the euro, which means that its costs stay high and foreign investment doesn’t flow in as it would after a devaluation.
There is another route out of the trap: default. If the government cannot possibly pay back all its debts, just repudiate them. You’ll be locked out of the international markets for some years, but you can only borrow at an exorbitant interest rate already, so what have you lost?
So long as the government can still raise enough in taxes to cover its own domestic spending commitments, it’s still in business. And after some years, you offer to pay all the creditors you stiffed ten cents on the dollar, they take the deal because something is better than nothing, and you can start borrowing internationally again.
A default is not necessarily a disaster. Greece has defaulted seven times before in its history, and almost every default was accompanied by a devaluation that put the economy on the road to recovery. But it has not defaulted this time, because that would almost certainly mean giving up the euro, which Greeks see as proof that they are a serious member of the mainstream European community.
Greece should never have been allowed to join the euro in the first place, but the Greek government concealed the scale of its debts and the European Union turned a blind eye to them. Then subsequent Greek governments, equally corrupt and irresponsible, exploited their euro membership to borrow a great deal more.
European banks, especially German and French ones, recklessly ignored the risk in lending to a country that was so obviously living beyond its means, because they reckoned that the central banks would bail Greece out rather than let a member of the eurozone default. There’s plenty of blame to go around, and the debt-fuelled binge went on for years, until the crash of 2008 brought the party to an end.
Greece’s debt now amounts to 175 per cent of Gross Domestic Product. No other developed country has ever reached that level of debt in peacetime without eventually defaulting. But the EU goes on feeding Greece just enough money to prevent a default – and 90 per cent of that money goes straight back to German, French and other European banks in debt repayments.
There is no way that Greece can ever repay its debts. Either its creditors cancel at least half its debt, or it must eventually default. Anything else is simply stretching Greece’s agony out. Indeed the Greek economy is already so badly damaged that there is some question as to whether the government could now raise enough income from domestic sources to maintain essential services after a default.
The Greeks have suffered a great deal of hardship already to stay in the euro, and they seem prepared to suffer some more. The European Union is prepared to cut them enough slack to keep them from defaulting, because its members fear the future of the euro itself if it becomes clear that countries can actually leave. However, the EU will not make enough concessions to put Greece on the road to recovery.
So this unbearable status quo will continue for a while – and eventually the Greeks will say “enough”. But it will still be five minutes to midnight for some months, and quite possibly even into next year.