Greece wants a debt break, but what about its poorer neighbors?
Alexis Tsipras’s first official act as Greece’s new prime minister was to lay a small bouquet of roses at the site of a World War II memorial. It marks the execution by firing squad of 200 mostly communist activists by Nazi soldiers.
The move was highly symbolic, and not only because Tsipras heads a party named Syriza, an acronym for The Coalition of the Radical Left. The 40-year-old prime minister’s rise to power has put him on a collision course with Germany, as he struggles to deliver on his campaign promises to renegotiate his country’s debt and overturn the painful austerity demanded by Greece’s creditors.
But if Tsipras is to bring home the deal he feels Greece deserves, he will have to more than face down the Germans. He’ll have to win over skeptical taxpayer in other euro zone countries, reassure European leaders worried about insurgent challenges of their own and make the case that – in a Europe still reeling from the 2008 global financial crisis – Greece is uniquely deserving of assistance.
Even after seven year of devastating recession, Greece remains much richer than most of its neighbors. Its gross domestic product is $22,000 a person. Albania’s is $4,000, Macedonia’s $5,000. In Bulgaria – like Greece, a member of the European Union – it’s $8,000.
“It’s very difficult to make the point to a worker in Bulgaria that they should give part of their taxes to help people in Greece who are richer than they are,” said Ruslan Stefanov, director of the economic program at the Center for the Study of Democracy in Sofia. “If you are spending money like that in Greece, you should spend money in Bulgaria and other Eastern European countries. This is an argument that is being made by politicians here.”
There’s no denying that the situation in Greece is heart-wrenching. The country has suffered economic ruin on a scale usually seen only in times of war. The crisis has shorn away nearly a quarter of Greece’s GDP. The unemployment rate is 26 percent, higher than that of the United States at the height of the Great Depression. Among the young, it has topped 50 percent. Families have been plunged into poverty. The private sector has been gutted. The public sector is in shambles.
And yet the alternative to austerity is money, and the money has to come from somewhere. Just as Tsipras would suffer if he tried to return empty-handed to the Greeks who elected him, so would politicians in countries like Germany if they tried to sell debt forgiveness to national parliaments and voters.
The European Commission, the European Central Bank and the International Monetary Fund, collectively known as the troika, hold some 240 billion euros in Greek debt, the largest chunk of which – some 70 billion euros – is ultimately backed by taxpayers in Germany, where there is little sympathy for a country many believe has lived beyond its means.
“There’s a feeling in Germany that we’ve made concessions over and over again,” said Marcel Fratzscher, president of DIW Berlin, an economics research institute, and a professor of macroeconomics and finance at Berlin’s Humboldt University. “What is the red line in Germany that nobody wants to see? The word ‘haircut.’ Nobody wants to see debt forgiveness.”
Officials of Tsipras’s party like to point to Germany after World War II, when the country not only received reconstruction funds through the Marshall Plan but was also the recipient of large-scale debt relief. Tsipras has said he will demand Germany pay war reparations for the damage caused during the Nazi occupation of Greece and ask Berlin to repay, with interest, a loan of $14 billion the Greek government was forced to provide at that time. It’s hard to see how any deal palatable to German taxpayers – the reorganization and extension of Greek debt in exchange for concessions on the structure of its economy – could be accepted by Tsipras or his electorate.
Tsipras has little leverage but has been far from conciliatory. As his coalition partner, he chose the Independent Greeks, a hard-right, nationalist party whose only point of agreement with Syriza is its opposition to the conditions imposed on the country by its creditors. Immediately after taking office, Tsipras — who as recently as 2012 had a photograph of a crowd celebrating the 1959 Cuban revolution hanging outside his office — had his first clash with the European Union, over calls for new sanctions on Russia.
The alternative to a deal – an eventual Greek default and exit from the euro zone – could hit European and global economies, but by far Greece would be the most damaged, as depositors raided their bank accounts and capital fled the country. For much of the rest of the EU, debt forgiveness could be equally damaging, undermining future efforts to manage European finances while providing a precedent for other countries to default on their obligations. In countries like Spain and Ireland, agreeing to help Greece could undermine support for centrist governments.
“They would be empowering their own opposition parties,” said Justin Knight, a strategist at UBS in London. “It’s another bit of contagion.”
Greek public sector wages rose by some 60% in real terms between 2000 and 2008. At least a portion of Greece’s economic devastation can be considered a correction. “Partly, it reflects the deflation of a bubble that was built up by excessive spending,” said Fratzscher. Yet Tsipras has been very clear about his desire to roll back many of the measures carried out at the request of Greece’s creditors. He has pledged to boost public spending, raise the minimum wage and roll back changes to the country’s labor regulations.
Bulgaria went through its own debt crisis in the 1990s, losing roughly a third of its GDP, and has only recently finished paying back the money it borrowed during socialist times.
“There is a clear understanding that Greece has not done enough to request more help from its partners in Europe,” said Stefanov. Like Bulgaria, Greece is a net beneficiary of the EU, receiving far more than it sends to Brussels, in agricultural subsidies and funds the union allocates to its poorer states. Between 2014 and 2020 it is slated to receive more than €17 billion from the EU.
“Greece has been receiving EU funding since 1982. I mean, come on, it’s been quite lavish funding,» Stefanov said. «Is this not a Marshall Plan?”
[Bloomberg]
