Greece\u2019s\u00a0financial drama has dominated the headlines for five years for one reason: the stubborn refusal of our creditors to offer essential debt relief. Why, against common sense, against the IMF\u2019s verdict and against the everyday practices of bankers facing stressed debtors, do they\u00a0resist a debt restructure. The answer cannot be found in economics because it resides deep in Europe\u2019s labyrinthine politics.<\/p>\n
Two options consistent with continuing membership of the eurozone\u00a0presented themselves: the sensible one, that any decent banker would recommend \u2013 restructuring the debt and reforming the economy; and the toxic option \u2013 extending new loans to a\u00a0bankrupt entity while pretending that it remains solvent.<\/p>\n
Official Europe chose the second option, putting the bailing out of French and German banks exposed to Greek public debt above Greece\u2019s socioeconomic viability. <\/p>\n
To frame the cynical transfer of irretrievable private losses on to the shoulders of taxpayers as an exercise in \u201ctough love\u201d, record austerity was imposed on Greece whose national income, in turn \u2013 from which new and old debts had to be repaid \u2013 diminished by more than that. <\/p>\n
Once the sordid operation was complete, Europe had automatically acquired another reason for refusing to discuss debt restructuring: it would now\u00a0hit the pockets of European citizens! And so increasing doses of austerity were administered while the debt grew larger, forcing creditors to extend more loans in exchange for even more austerity.<\/p>\n
Our government was elected on a mandate to end this doom loop; to demand debt restructuring and an end to crippling austerity. Negotiations have reached their much publicised impasse for a simple reason: our creditors continue to rule out any tangible debt restructuring while insisting that our unpayable debt be repaid \u201cparametrically\u201d by the\u00a0weakest\u00a0of Greeks, their children and their grandchildren.<\/p>\n
In my first week as minister for finance I was visited by Jeroen Dijsselbloem, president of the Eurogroup (the eurozone finance ministers), who put a stark choice to me: accept the bailout\u2019s \u201clogic\u201d and drop any demands for debt restructuring or your loan agreement will \u201ccrash\u201d \u2013 the unsaid\u00a0repercussion being that Greece\u2019s\u00a0banks would be boarded up.<\/p>\n
Five months of negotiations ensued under conditions of monetary asphyxiation and an induced bank-run supervised and administered by the European Central Bank. The writing was on the wall: unless we capitulated, we would soon be facing capital controls, quasi-functioning cash machines, a prolonged bank holiday and, ultimately, Grexit.<\/p>\n
The threat of Grexit has had a brief rollercoaster of a history. In 2010 it put the fear of God in financiers\u2019 hearts and minds as their banks were replete with Greek debt. Even in 2012, when Germany\u2019s finance minister, Wolfgang Sch\u00e4uble, decided that\u00a0Grexit\u2019s costs were a worthwhile \u201cinvestment\u201d<\/a>\u00a0as a way of disciplining France et al, the prospect continued to scare the living daylights out of almost everyone else<\/p>\n By the time Syriza won power last January, and as if to confirm our claim that the \u201cbailouts\u201d had nothing to do with rescuing Greece (and everything to do with ringfencing northern Europe), a large majority within the Eurogroup \u2013 under the tutelage of Sch\u00e4uble \u2013 had adopted Grexit either as their preferred outcome or weapon of choice against our government.<\/p>\n Greeks, rightly, shiver at the thought of amputation from monetary union. Exiting a common currency is nothing like severing a peg. Alas, Greece does not have a currency whose peg with the euro can be cut. It has the euro \u2013 a foreign currency fully administered by a creditor inimical to restructuring our nation\u2019s unsustainable debt.<\/p>\n To exit, we would have to create a new currency from scratch. In occupied Iraq, the introduction of new paper money took almost a year, 20 or so Boeing 747s, the mobilisation of the US military\u2019s might, three printing firms and hundreds of trucks. In the absence of such support, Grexit would be the equivalent of announcing a large devaluation more than 18 months in advance: a recipe for liquidating all Greek capital stock and transferring it abroad by any means available.<\/p>\n With Grexit reinforcing the ECB-induced bank run, our attempts to put debt restructuring back on the negotiating table fell on deaf ears. Time and again we were told that this was a matter for an unspecified future that would follow the \u201cprogramme\u2019s successful completion\u201d \u2013 a stupendous Catch-22 since the \u201cprogramme\u201d could never succeed without a debt restructure.<\/p>\n This weekend brings the climax of the talks. <\/p>\n The euro is a hybrid of a fixed exchange-rate regime, like the 1980s ERM, or the 1930s gold standard, and a state currency. The former relies on the fear of expulsion to hold together, while state money involves mechanisms for recycling surpluses between member states (for instance, a federal budget, common bonds). The eurozone falls\u00a0between these stools \u2013 it is more\u00a0than an exchange-rate regime and\u00a0less than a state.<\/p>\n And there\u2019s the rub. After the crisis of 2008\/9, Europe didn\u2019t\u00a0know how to respond. Should it prepare the ground for at least one expulsion (that is, Grexit) to strengthen discipline? Or move to a federation? So far it has done neither, its existentialist angst forever rising. Sch\u00e4uble is convinced that as things stand, he needs a Grexit to clear the air,\u00a0one way or another. Suddenly, a permanently unsustainable Greek public debt, without which the risk of Grexit would fade, has acquired a new usefulness for Schauble.<\/p>\n What do I mean by that? Based on months of negotiation, my conviction is that the German finance minister wants Greece to be pushed out of the single currency to put the fear of God into the French and have them accept his model of a disciplinarian eurozone.<\/p>\n","protected":false},"excerpt":{"rendered":" Greece\u2019s\u00a0financial drama has dominated the headlines for five years for one reason: the stubborn refusal of our creditors to offer essential debt relief. Why, against common sense, against the IMF\u2019s verdict and against the everyday practices of bankers facing stressed … Continue reading