The prerequisite of a lasting compromise is that political leaders are willing to consider a joint responsibility for resolving the debt and growth problems that Europe is facing as a whole.
Europe is loaded with high debt levels. A number of renowned European economists have put forward proposals to deal with the European debt problem which is choking Europe’s recovery and might lead to long-term stagnation or even disintegration of the euro area (see e.g. the PADRE proposal by Paris and Wyplosz, 2014; also the latest ‘Monitoring the Eurozone’ Report signed by – amongst other – Corsetti, Lane, Reichlin, Weder di Mauro; see Corsetti et al., 2015). Politics is behind the curve and politicians are pretending that somehow the problem will get resolved without having to face difficult cross-European and within-country distributive issues and also accept the legitimacy of alternative economic strategies which are rooted in the heterogeneity of European electoral outcomes but also in economic analysis itself.
In order to deal with the European debt problem the following has to be recognised:
- The build-up of debt prior to the crisis was the joint responsibility of insufficient (or inexistent) monitoring and regulation of the banking systems at the European level; this was an inexcusable ‘blind spot’ in the EU’s institutional structure which had committed itself to fully liberalised capital markets. Hence creditor and debtor countries have to take joint blame for the build-up of unsustainable debt situations in countries such as Greece.
- An essential condition to emerge from a debt trap is to make a sustained joint effort to achieve growth (see also Watt, 2015). The proposals by the new Syriza government to relax the fiscal constraint in the form of ‘only’ targeting a 1.5% primary surplus (rather than the 4-5% sustained primary surplus envisaged in the current IMF-EU-ECB programme) as well as to move towards growth-related repayments of the debt scheme are eminently reasonable and have been supported by a wide range of economists (see Mauro, 2015; Fratzscher et al., 2015; Darvas, 2015).
- There has to be a recognition that dealing with longer-term current account issues within Europe is of utmost importance. The negligence of this in the current Syriza programme is worrying and it has to be addressed with a range of tools to expand and modernise export capacity in Greece (but also in many other chronic deficit countries). This has to be a prime target not only at the national level but also requires a mobilisation of resources at the EU level (in the context of the European investment initiative, using EU Structural funds, EIB resources, etc.). Relying simply on a wage-driven adjustment process of ‘real exchange rates’ in a recessionary climate will not remove this obstacle to sustainable growth.
- Countries within the euro area are entitled – within the context of not imposing burdens on other countries’ taxpayers – to choose their own strategies to deal with longer-run development processes. The EU, IMF, ECB, etc. should not pretend that there is a single ‘model’ of economic development as regards the role of the state, the system of labour relations, the financing and role of public services, etc. Such a ‘single model’ view has no basis in economic theory or in the track record of a wide range of economic approaches within Europe or internationally (see the diversity of Scandinavian, Anglo-Saxon, German models in Europe or of Korea, Japan, etc. in Asia). Hence the Syriza government, which received a mandate from its electorate, has the right to negotiate a different structure of reform policies with regard to a further loan/debt repayment programme compared to the previous government.
- Syriza is also right in aiming to discuss the European debt problem at the pan-European level (they suggested a ‘European debt conference’) and not only in relation to Greece. The bargaining processes between debtors and creditors should not simply be subject to behind-the-scenes negotiations (which are skewed in favour of creditors) but should be subject to the political scrutiny of European electorates. The wider context in which such negotiations would take place might allow the European public to recognise that there are longer-term structural issues to be resolved in the design of further steps of integration which are not just relevant in relation to Greece but concern the future of the European Union as a whole.
Corsetti, G., L. Feld, L. Garicano, P. Lane, L. Reichlin, H. Rey, D. Vayanos and B. Weder di Mauro (2015), Time is Short and the Need Great: New Institutions and New Policies for a Workable Eurozone, CEPR – Monitoring the Eurozone, London.
Darvas, Zs. (2015), A major step towards a Greek compromise – Finance Minister Varoufakis’ proposal provides a good basis to start discussions, BRUEGEL, Brussels.
Fratzscher, M., C. Große Steffen and Malte Rieth (2014), ‘GDP-Linked Loans for Greece’, DIW Economic Bulletin, No. 9 (November), German Institute for Economic Research (DIW), Berlin, pp. 40-49.
Mauro, P. (2015), Greece advances a good idea: indexing its debt repayments to economic growth, RealTime Economic Issues Watch, 2 February, Peterson Institute for International Economics, Washington DC.
Paris, P. and C. Wyplosz (2014), PADRE – Politically Acceptable Debt Restructuring in the Eurozone, Geneva Reports on the World Economy, Special Report 3, International Center for Monetary and Banking Studies, Geneva.
Watt, A. (2015), ‘Is Greek Public Debt Unsustainable? It’s The (nominal growth rate of the) Economy, Stupid!’, Social Europe, Occasional Paper, January 2015, Macroeconomic Policy Institute, Berlin.
This article is taken from the wiiw Monthly Report 02/2015. The Monthly Reports contains brief articles on topical issues related to the economies in the CESEE and CIS countries. It is published 11 times a year and distributed exclusively to Members of the wiiw. Please click here if you are interested in becoming a wiiw Member.