Weekend Economists Silent Night Christmas Eve 2014

[Demeter]

32. Greece to the Eurozone’s Rescue: Why the Troika Should Forgive Greece’s Debt

The European Commissioner for Economic and Financial Affairs, Pierre Moscovici’s unnecessary—and unseemly—visit to Athens served to spotlight Europe’s corrosive politics. Mr. Moscovici chose to all but endorse Antonio Samaras, the beleaguered Greek Prime Minister, who promises to play by the European Union’s dysfunctional rules. And the Commissioner described as “suicidal” the positions held by the opposition party Syrzia, which may well lead the next government and correctly deems the EU’s rules to be intolerant.

His boss, European Commission President Jean-Claude Juncker, weighed in by expressing his preference for Greece to be led by “known” faces.

Greece should not have been a member of the eurozone. But after the German Chancellor Helmut Kohl ensured Italy’s inclusion in May 1998, Spain and Portugal were waived in. So, the inevitable Greek entry came in 2002. By then, any vestige of economic good sense in the euro’s construction had been abandoned in the name of peace and friendship, a cause that Moscovici and Juncker presumably seek to promote.

From October 2009, when Greek authorities acknowledged that they had lied about their fiscal accounts, to May 2010, the claim was that the problem would go away without external help. When eventually the troika—the European Commission, the European Central Bank, and the International Monetary Fund—put together a large bailout fund, the manifestly untenable claim was that Greece would repay its private creditors in full. In July 2011, the repayment terms on the troika’s debt were eased, but it was too little too late. Large losses were eventually imposed on private Greek creditors but not before harsh austerity caused an extraordinary slump in growth and lasting misery.

Pretty much every time there was a choice between the right and wrong decision, the wrong one was taken.

Today, the only right way forward is for the troika to allow Greece to repay its official creditors in, say, 100 years. This will effectively mean debt forgiveness but the cosmetics may help German leaders tell their citizens that they will be repaid...

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