Greek Myths – and Realities

 tsipraswin.jpg, Lorenzo Gaudenzi/flickr

By Bill Barclay

Everybody “knows” that Greece has too much debt, that is unsustainable and thus a “responsible” government must reduce spending and pay off the debt. And, because Greece is facing some maturity dates in the near future, Syriza won’t be able to implement its program of restarting the economy.

But what “everybody knows” about Greek debt isn’t true. It is important to grasp this, both in terms of the arguments we must win with conservatives over the next few months and to see/support, if possible, a path for Syriza’s economic policies. And, if what “everybody knows” about Greek debt isn’t true, then the demand of Greek sovereign debt holders for immediate payoff, no renegotiation of the memorandum, etc. should be rejected. 

Let’s start with the debt question, since much turns on this. There are two closely related myths about Greek debt. First, is the simple – and simple minded – argument that Greek debt is out of control and its reduction should be the first task of any “responsible” government. Now, it is true that Greek debt/GDP ratio is high, running up sharply from about 100% of GDP before the crisis to 175% today. However, most of the increase in the debt/GDP ratio has occurred, not because the government had been issuing more debt, but because the catastrophic austerity policies of the previous Greek governments (of course urged, imposed and abetted by the “Troika” – the European Commission, the European Central Bank, and the International Monetary Fund) resulted in a GDP plunge of about 25% from the financial panic through 2014. Thus, even a constant level of debt outstanding (and Greece has reduced somewhat the level of debt) will result in an increased debt/GDP ratio. The Greek government has not been issuing more debt but has rather imposed six years of negative GDP growth on the people – who finally said, “enough.”
This first myth leads to another that is closely linked: that this high debt/GDP ratio imposes a huge cost on the Greek economy because of interest payments, draining resources and undermining investor confidence. The reality is quite different, however. While Greece had to devote 7.4% of its GDP to interest payments in 2011 and over 5% in 2012, today these payments are only 4.3% of GDP, below that of Portugal and Italy and only slightly above that of Ireland. Even that paragon of economic virtue, Germany, has at times faced interest payments to GDP of 3% or higher while Belgium successfully navigated a period of interest payments to GDP of over 5%. (The 2012 debt restructuring did assist in this favorable trend.)    
If the debt/GDP ratio has been driven up by the very austerity policies that were going to restart economic growth, and if the interest rate burden is not excessive (and is actually trending down), why are Greece’s creditors seeking yet more austerity?   It is important to note here that, as a result of the 2012 debt restructuring, the vast bulk of Greek sovereign debt (over 80%) is held by “public” institutions such as the European Central Bank. These entities could and should be responsible to popular interests rather than simply the demands of the financial markets.
So, in the upcoming negotiations, these primarily EU public entities face a choice. They can serve their creditor classes and ruling elites, attempting to force continued austerity, or they can act on that old admonition of financial markets that “a rolling loan carries no loss” and stretch out the debt. It would, of course, be even better if there could be a haircut on the debt. What about, say, forgiving half as was done for Germany after WWII? (German debt/GDP ratio reached more than 6:1 during the war.) 
This economically rational and politically just decision would allow Syriza the opportunity to implement their economic proposals: kick-starting the economy by public investment, reversing key aspects of the memorandums by returning the minimum wage to pre-2010 levels, and restoring at least some of the provisions necessary for social survival such as reconnecting electricity, getting the health care system back functioning, etc.
And how would this program impact the debt/GDP ratio and interest payments questions?  Positively. Just as the GDP plunge drove the huge increase in debt/GDP ratio, so GDP growth will reduce that ratio. And that will mean a declining interest rate to GDP drain as well. If Syriza’s program generates economic growth rates higher than the today very low interest rates Greece faces on outstanding sovereign debt – and, in an economy with the level of unused resources such as Greece this is a very likely outcome – the debt/GDP ratio will fall and interest payments will be less of a drag on GDP – and the austerians will again be proved wrong. Of course, this good outcome for the Greek people could be enhanced by external European-wide financing to support Syriza’s program, but that, while rational, is probably too much to expect.

 BilBarclayDustin-2.png Bill Barclay is co-chair of Chicago DSA and a founding member of the Chicago Political Economy Group.

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