Adam Posen is president of the Peterson Institute for International Economics and, like every international economist right now, he's glued to the drama in Greece. There is, he says, a simple solution to the crisis: the Northern European countries should write a check and end it. But they won't, and in a conversation on Monday, he told me why. The interview has been lightly edited for length and clarity.
Ezra Klein: Imagine I haven’t been following this at all. What’s the simplest explanation for why the world is so concerned about Greece today?
Adam Posen: The simplest explanation is that for the euro to remain together, and therefore to remain a stable currency, you have to believe the membership pays their debts. Right now, the Greeks are not going to pay back what they owe the rest of Europe. Right now, there literally aren’t enough euros in the Greek financial system, public and private, to pay back what they owe.
So Greece will have to issue IOUs to their creditors and their businesses. And that will mean you have a currency in Greece that is not the euro. It will be a kind of scrip. And so the Greek people have been pulling their money out of the Greek financial system because they don’t believe this scrip will be worth as much as the euro.
The way we deal with this kind of problem in the US is we have fiscal transfers. Mississippi and Alabama never really pay back what they owe California and New York, and that's okay. So you can see the crisis in Greece two ways: you can believe it’s a failure because the Greeks are reneging on their debts or because Germany is not treating Greece like the US treats Mississippi, as a state they have to look after.
EK: Why is this happening right now though? What's changed from, say, six months ago?
AP: What has changed since a year ago is a breakdown in trust and a change in politics. The economic fundamentals really haven’t changed. But you have this new government in Greece that is taking a harder line with its creditors. They’re saying, basically, we can’t pay all this back, you need to be more realistic. And the European leadership has reacted to this first by saying, sorry, that deal is not on the table, and second, by saying, we basically just don’t trust you. You’ll tell us one thing and then go do something else.
So that’s the key: the economics didn’t change. It was a change in the Greek government, and then a change in the relationship between that government and the rest of Europe.
EK: One thing that makes this hard to follow from the US is it's not entirely clear which outcome to be rooting for. Greece can stay in the euro and try to endure grinding depression for years and years or they can leave the euro and endure a financial crisis. Which outcome is better?
AP: It’s easy to say what people should want to happen in Greece. It’s just impossible to get there. The Northern Europeans should write a check and make this go away. They should accept the fact that Greece is not going to pay most of its debts. They also need to accept that these debts are partly their fault. These loans were made by Northern European financial institutions, and the Northern Europeans should suffer for making stupid loans, too.
But that won’t happen. Northern European governments like Germany, Finland, Austria, the Netherlands, and Sweden don’t want their banks to lose money and they don’t want to tell their voters that they’re handing money to the Greeks.
EK: You often hear about how the Greek government is barely able to collect taxes. How big a contributor is that to this crisis?
AP: There is no question that the Greek system has done a terrible job of collecting taxes, and especially collecting taxes on the richest people. For instance, shipping is constitutionally protected from being taxed, and that’s where many of Greece’s great fortunes are. Taxation on real estate is also poorly collected. But in terms of Greece racking up all its debt, that isn’t the fundamental issue. The fundamental issue was the surge in capital from Northern Europe to Greece during the early and mid-2000s. Even if the Greeks hadn’t been able to collect much tax revenue they couldn’t have gotten into so much debt if people weren’t giving them all these loans.
EK: What do you think the financial consequences of Greece leaving the eurozone would be?
AP: I think the short-term consequences are going to be much smaller than people fear, with the huge, horrible exception of the Greek people themselves. It will be awful for them. But pretty much all the Greek debt is now in government hands. The total amount of debt, which is about $200 billion euros, is real money, but it’s really just about 1-2 percent of total euro area GDP. And every bank and every investor has known this has been coming for months.
But that’s the short term. The long-term is the IMF will be out billions of dollars which they need to pay back to their poorer members. The euro will be seen as less safe a currency than it once was and that will permanently raise interest rates in many European countries. It will permanently reduce the appetite for euro assets. And it will mean that the so-called periphery countries in Europe — notably Portugal — will be looked at with suspicion going forward. And that will make it harder for them to get investment and funding.
EK: What about the political side of it? Do you think this raises the possibility of dangerous political backlash in Europe?
AP: Absolutely. Branko Milanovic had a nice essay about how bad the politics of Europe could get in the aftermath of this. It’s a bit extreme but it’s a good point. Basically what you’ve had is the undermining of European solidarity. There is this level of distrust and resentment. The Greek people feel the Northern Europeans are trying to get blood from a stone and the Germans feel they’re being exploited.
Debt didn't cause the crisis
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Greek debt crisis: "Grexit" fears spread across Greece and the EUView all 49 stories
In withdrawing from negotiations with Greece's international creditors and holding a referendum on whether Greece should adopt the further austerity required by the lenders' financial aid package, Greek Prime Minister Alexis Tsipras figuratively pulled out a gun and threatened to blow a hole in the life raft that was given to his country in an attempt to get a nicer boat. The referendum may save his left-wing Syriza party but may cause Greece to default on its loans and exit the common Euro currency.
Greece has long been irresponsible financially -- originally having excessive pensions, early retirement ages, an over-regulated and corrupt economy, 20 percent of the workforce in the employ of a bloated government, and uneven tax collection. Although some progress on these categories was required by the international creditors to grant the two financial bailouts Greece has already received, more austerity and reform are needed to clear the still abundant deadwood out of the Greek economy so that it can resume normal economic growth.
Tsipras was elected in the first place by excessively promising an austerity-weary Greek public that he would repudiate the latest bailout deal with creditors and negotiate an end to the required austerity. In the negotiations, the creditors have once again made some concessions, but have tired of Greece's antics. Years of living excessively high on the hog really requires more tough austerity and reform on Greece's part in order to have a chance to again have real prosperity.
Shockingly, some Western economists, including Nobel Laureate Paul Krugman, are instead blaming European governments, such as Germany and France, for not letting Greece up off the mat by writing off some of its debt, so that the Greek economy can grow again and thereby eventually pay off the rest of the debt. Unsurprisingly, these countries, after having bailed out Greece twice, are unenthusiastic about a costly write-down of debt. And the artificial growth propounded by such economists will only make things worse. In the long run, Greece and the international financial system will be better off if Greece is forced to right the ship instead of floating along on pieces of wreckage. In the long-term, businesses and even countries must be held responsible for their actions, even if that means "tough love." Otherwise, they will realize that they can again someday live beyond their means.
Politically, the referendum is smart on Tsipras's part. By pointing a gun at the life raft, he plays on fears that if Greece goes down so will other fragile European economies -- such as Spain, Portugal and Italy -- to improve his negotiating position. A "yes" vote by the Greek people to accept more austerity relieves him of his excessive campaign promises to fight the continuation of such unpleasant belt-tightening. Tsipras advocates a "just say no" vote, believing it will show that the Greeks mean business by cocking the gun for future debt relief negotiations.
Yet things have changed after five years of bailing out Greece. As a whole, the European economy is better than it was in 2011 or 2012 and is less susceptible to financial contagion from Greece going down. Also, the other most fragile economies in the Eurozone are healthier now, with Spain and Portugal returning to growth and Italy beginning to do so. Furthermore, there are now far fewer private holders of Greek debt, there is now a new emergency bailout fund for emergencies, and the European Central Bank has pledged to "do whatever it takes to save the Euro." Although the latter policies of reserve funds and money printing are unwise, it has eroded Greece's negotiating position vis-à-vis Europe. Finally, further eroding Greece's position is that in the end, the Greek economy is only 1.5 percent of that of the Eurozone.
Politically, fears have been raised that if Greece defaults and exits the Euro currency, it still would be a member of the European Union and could thus veto continued European economic sanctions against Russia over its interventions in Crimea and eastern Ukraine. The unstated implication is that the end of European sanctions could somehow make Russia more aggressive and lead to a future war. Whoopty doo. The sanctions, although hurting Russia economically, have had little effect on its behavior in either place.
The long and the short of it is that Greece's international creditors should end the bailouts and let the ungrateful and arrogant Greece default and exit the Euro currency. The major long-term ill-effect that this short-term disruption would generate would be on European pride in a common currency that should have never been concocted in the first place. For the long term, cutting the Greek life boat away and leaving it drifting on its own, will teach the Greeks -- and other irresponsible countries, such as Spain, Portugal, and Italy -- that when you behave irresponsibly over many years, some pain is needed for the gain of renewed economic vigor. As for the United States, with an artificial economic recovery driven by printing bucketloads of money and a $18 trillion public debt caused by excessive spending on defense and domestic social programs over a long period, the proper response to the Greek and Eurozone mess is humble silence and non-intervention and a focus on getting its own fiscal house in order by its own austerity program to pay down that growth-stifling debt.
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