Keywords: IPE; International Political Economy, IMF; International Monetary Fund
On July 5th, 2015 in Greece, Voters had been asked whether to accept or reject the country’s multi-billion euro bailout deal with the European Union that called for more austerity in exchange for rescue loans. Some 62.50% of Greeks participated in the referendum which resulted in a 61.31% voted “NO (OXI) and 38.69% voted “YES” (NAI). Some are calling the referendum results a win for “Democracy”, especially that it now gives Greece more bargaining power to negotiate a more favorable “Bailout package” with its creditors. I am happy for the people of Greece, but, dubious about the referendum being the key ingredient to fixing Greece burgeoning debt. Due to the fact that, the political leaders perpetual governance which in part played a role in landing Greece where it is today remains somewhat intact.
Greece burgeoning Debt & Governance:
Greece went from an economy that was growing at an annual average of 4.2% to now 0.6%. Now, prior to 2008 global financial crisis, Greece spent big time on things like the military, pensions, public sector and other social benefits. Meanwhile, tax evasion flourished with little to no tax enforcement policies amidst the approx. $11 Billion Euro spent to host the Summer Olympic Games in Athens (2004). Most importantly, Greece politicians have been either mistakenly understating the actual debt or just plain simply lying about the burgeoning debt for years. Also, Greece was locked out of the financial markets and the only way for them to get back in was to borrow more money. As a result, Greece borrowed money from the Eurozone, European Central Bank and the IMF. Today, collectively the creditors to Greece (mentioned in previous sentence) is also called the “Troika”.
Albeit, the referendum may give Greece more bargaining strength which can land them a more favorable bailout package one which could see “austerity” measures to a minimum or varnish (dubious). Although, I am in jubilation for the Greek people that they can finally get a bailout deal they are so well-deserved, I am however dubious about the perpetual political governance. After all, this is not the people of Greece fault, but, rather improper management of the country’s economy. For instance, Greece politicians understated (lied) about its debts amidst the economy was mired in corruption, bureaucracy, tax evasion and generous social perks afforded to Greek citizens.
Although, this may be the case that Greek politician are in part to blame (align with the austerity measures of course), some may make the case that the current government have only been in office for a few months. In support of this, Alexis Tsipras and his party Syriza was in power for a few months since January to current and yes they’ve inherited much of the burgeoning debt. In any case, since their inception into office I have questioned if they done anything substantially different in regards to governance. After all, the debt exacerbated under them; GDP has fallen by some 25%, unemployment is now up at 26%, Youth unemployment rate is approx. 49.7%, Athens recently missed their $1.5 Billion Euro payment to the IMF, making it the first advance nation to do so in the IMF 71 year history.
Some are calling for Greece to receive “Debt forgiveness” evocative to that of Germany debt agreement in 1953. In 1953, the Germans signed a debt agreement with about 20 countries (among them was Greece) which effectively wrote off a large chunk of Germany loans and restricted the rest. In part, the deal was generous to West Germany because it cut the amount it owed, extended the repayment schedule and granted low interest rates. Most importantly, some scholars like Professor Albrecht Ritschl of the London School of Economics argues that; “The London Agreement gave Germany sweeping debt forgiveness and protection from creditors, in exchange for pro-market reforms. Owing to the London Agreement, West Germany was able to borrow on international markets again and free of burdensome debt payments, resulted in its economy to grow strongly. Thus, why some will make the case for easier terms for troubled countries. Hence, why people like Eric LeCompte, executive director of the debt relief organization Jubilee USA; are making the case that the same opportunity given to Germany in 1953 should be given to Greece.
However, I always say when looking back in history one must speak of history sometimes in “circumspect” when drawing comparisons. It is important to note that, Germany 1953 debt forgiveness was driven by the United States. For instance, the United States at the time needed a strong West Germany as an ally against the perceived threat that was the Soviet Union (Cold War). Moreover, Albrecht Ritschl stated that; “the U.S. was also concerned that being too tough on West Germany might repeat the mistakes of the past. After World War I, crippling reparations on Germany helped fuel the rise of Adolf Hitler.” So in other words, one cannot just simply make a comparison to 1953 Germany and contemporary Greece because the fact remains that Germany was much more important in regards to global geopolitics than Greece today.
In addition, upon the 1953 deal (which 20 countries played a vital role inclusive of Greece) Germany was already posting trade surpluses when the agreement was signed. On the other hand, Greece lacks strong export-oriented industry like Germany, which in part why creditors are insisting on reforms to make Greece more competitive. Maybe, not the best of approaches on insisting that Greece implement such reforms, but, nonetheless the comparison have many holes to consider.
In closing, it is critical to note that; since 1953 there have been enormous geopolitical and global economic changes. Thus, granting Greece debt relief liken to Germany 1953 debt relief could potentially trigger a “moral hazard” emboldening other countries within the Eurozone like Spain (not to pick on anyone) to ask for similar packages.