The monetary politics behind Greece's crisis and its future with Europe


Greece’s missed $1.7 billion payment to the International Monetary Fund at the end of June accelerated a debt crisis that has been crippling the country’s economy for years, fueling the suffering and resentment of millions of Greeks. A few days later, Greek voters rejected a new round of austerity measures demanded by European financial institutions in exchange for another bailout. Two weeks later, Prime Minister Alexis Tsipras pushed an austerity plan through parliament, despite running for office on an anti-austerity platform, and this week a bailout deal has been reached “in principle.”

Jeffrey Frieden, the Stanfield Professor of International Peace at Harvard University, specializes in the politics of international monetary and financial relations. The GroundTruth Project interviewed Professor Frieden on the crisis in Greece and its implications. This interview has been edited and condensed for clarity.

Nathaniel Lathrop: Thanks for taking the time. Since we’re in the midst of a currency crisis, I thought I’d talk to the guy who knows.

Jeffrey Frieden: (laughs) Yeah, crisis is my business and business is good.

NL: Greece is in the eurozone, it is a weak exporting, tourism-based economy. And it is trying to integrate its economy with northern and central Europe.

JF: Correct. Tourism and shipping, by the way. Long experience in shipping from Odysseus on upward.

NL: Yeah, way back in [the port city of] Piraeus. If Greece were asked to join the euro now for the first time, and you were advising the Greek prime minister, what would you say?

JF: I would say it is unambiguously in the interest of Greece to be in the European Union. Greece is a small economy, it is an economy that has relied typically on close ties with the rest of Europe, it’s hard to imagine Greece existing outside of an integrated European economy. The general economic evidence is that small countries benefit most from economic integration.

Is being in the eurozone a good thing for Greece? Well in principle, yes, because it facilitates economic integration more generally. For one thing, the fact that Greece is in the eurozone makes it that much easier for citizens in member states of the eurozone to be tourists in Greece. I can tell you, because I’ve worked on this, Greeks are extraordinarily enthusiastic about the euro, even in the aftermath of the crisis. In principle.

The core of the question is, “How should the Greeks respond to the situation they find themselves in?” They’re being asked to undergo probably 3-5 more years of austerity in the midst of the worst economic crisis Greece has ever experienced. Much worse than the Great Depression with 25 percent unemployment, 50-70 percent youth unemployment, tremendous restrictions on what the government can do to try to lessen the burden of this crisis on the Greek people. Is it worthwhile making the sacrifices necessary to stay in the eurozone, if those sacrifices mean another 3-5 years of terrible hardship?

While if you’re a 23-year-old Greek high school or college graduate and you haven’t had a job in 5 years, and (you face) the prospect of not having a job for five more years, that’s probably not such a great deal. What you’re probably thinking is, “Well if they do this, I’m going to leave the country. Cause there’s no prospects for me here.” And if you don’t have the wherewithal to leave the country then you’re stuck. That question of whether the Greeks should be signing on to this program has split the Greek population.

This is not people acting out of some kind of crazy notion that they want to stick it to their creditors. You’re talking about people’s livelihoods and their lifelong earnings being severely threatened, in a way that we in the US have not experienced since the 1930s. We’re talking about people’s lives being ruined by the decision to buckle under to the demands of the creditors.

NL: Let’s bring the Germans in. Is what they’re doing smart for themselves? Do they actually speak for the eurozone? We keep having this drama of [Greek Prime Minister] Tsipras and [German Chancellor Angela] Merkel. And the loan payments are often simplified in reporting as “going to Germany” but whenever I hear that Greece makes a payment it goes to the IMF. What’s up with that?

JF: (Laughs) OK. It’s a fairly complicated chronology. So to go back in time a bit, let’s remind ourselves that the Greek government ran massive deficits, which was very irresponsible, and they lied about them. There’s no question they lied about them. It was not the current Greek government, it was several Greek governments ago. It was a conservative Greek government that was then voted out of office. When the socialist Pasok came in, they revealed to the world that the previous government had lied about its finances, and that’s what caused the initial panic. So the Greek government did borrow irresponsibly, but the northern European bankers lent irresponsibly! So in my world, irresponsible borrowing is a bad thing. Irresponsible lending is just as bad a thing. So there’s equal moral or ethical responsibility on either side of the teller’s window as far as I’m concerned. And the Germans have never really taken responsibility for the reckless lending their bankers engaged in.

NL: Can I just stop you right there? This is another thing that bugs me as well. You said “their bankers.” This was private banks, primarily?

JF: Private-driven banks!

NL: Investing in Greek government bonds?

JF: Greek government bonds. Now let me point out something else, because it is relevant to the broader politics within the eurozone. Greece is very unusual amongst the eurozone debtors, because (the debt was), private to private lending.

The big debtor is Spain. In the case of Spain it was entirely private. There was no government borrowing at all. It was private German, Dutch, French banks, lending to Spanish banks and eventually to Spanish mortgage holders. So they had almost exactly what we had. They had a huge housing boom, an expansion, which was financed by borrowing, the expansion turned into a bubble, and that bubble burst. When the bubble burst, both the mortgage holders and the banks are in big trouble.

So the broad European picture is very similar to the broad American picture. The Greek part of that picture is a little unusual because it was government borrowing. But we had a lot of government borrowing as well, borrowing by states, borrowing by the Federal government. In the Greek case, it was private lending to the Greek government. When the crisis hit in 2008…

NL: What’d they spend the money on, by the way?

JF: The Greeks? They spent it on expanding the public sector, employing a lot of people who probably didn’t need to be employed, a lot of political patronage, probably paying richer pensions to people than the country could’ve afforded... I mean, I’m not sure anyone’s ever traced the money...

NL: Yeah, actually, that’s one of the things I’m trying to do is trace the money…

JF: Yeah it’s hard, it’s very hard. We say money is fungible, the Spanish say, “Money doesn’t have a stamp on it.”

When the crisis hit, just like in our country, the reaction of the governments was, “If we don’t do something, then our banking system will collapse.” That was the reaction in 2008 at the end of the Bush administration. And it was the correct reaction, because as we know, the best way to turn a recession into a depression is to allow the financial system to collapse.

So what the European governments essentially did was bail out their banks. Now, Merkel was faced with a political problem. She recognized that bailing out the banks of Germany would be extremely unpopular. There had been a big bailout of the public banks in 2003, it had cost hundreds of billions of dollars, it was very unpopular, and it lost the Social Democrats the election.

She can’t go to the German people and say, “We’re going to spend a trillion dollars to bail out the German banks,” because we just bailed them out! So instead, she said, “This is a bailout of the lazy Greeks.”

Unfortunately that narrative has colored the politics of the crisis ever since. Germans don’t understand that the main recipients of these bailouts have been German banks! Or Dutch banks, or French banks or Finnish banks…. The Greeks have seen none of this money, it’s gone to service some of the debts the Greek government owes to its creditors. Almost immediately, all those debts were taken over by public institutions. That was carried out by the creditor governments, by the European Central Bank and by the IMF.  

Greece owes very little to private creditors any more. Which just makes matters worse, because back in 2008, 2009, 2010, we could have said, “Yeah, let the creditors take the hit.” Now, it actually is money owed to the German government, the Dutch government, so the taxpayers are on the hook.

You asked earlier if it was in the interest of Germany — I think in the long run it is not in the interest of Germany to continue this charade forward. The European economy has been dead in the water for almost 8 years, it is doing worse now than it did in the 1930s in the aftermath of the Great Depression, and the main reason for the stagnation of the European economy is this debt overhang.

I think that a benevolent dictator in the European economy would say, “You’ve got to write off 30 or 40 percent of these debts, and the longer you wait, the worse the economy is going to do.” The way the crisis has been mismanaged has subjected all of Europe, especially the debtor countries, but all of Europe to much greater suffering than is necessary.

This story is presented by The GroundTruth Project. 

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