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Greek Debt Restructuring is preferable to continued Austerity or Default

Most EU officials and most government officials of Eurozone countries officially reject any suggestion of a debt restructuring for Greece or Ireland. Rising financial exposure to the troubled economies will raise political resistance against further financial help in the countries granting the assistance, writes Professor John Ryan.

Meanwhile, continuing pressure for ever more austerity demanded in return for external assistance will raise political opposition against adjustment policies in the troubled countries themselves. In the end, this leaves only one route open. Populist political opposition as seen by the recent European Parliament elections has already gathered momentum in creditor and debtor nations and will enforce an end to either austerity or financial assistance and will thus trigger a debt restructuring.

From the outset the Euro was a controversial construct. It was known at its inception that the Eurozone had design flaws, including a lack of fiscal union, and no mechanisms to deal with asymmetric shocks or diverging competitiveness. A number of those concerns materialized, and investors have become increasingly skeptical about the sustainability of the Eurozone in its current form. However, political factors trumped economic concerns when the Euro was introduced: a united Europe, and thereby the single currency was at root a political project.

Now the project is in real trouble with out-of- touch domestic and European political elites and an establishment unable to address the concerns of public opinion.
 Many people no longer trust mainstream politicians, EU technocrats and elites in general. They seem captured by vested interests and incapable of improving the life of ordinary people, let alone setting out a compelling vision of a brighter future.

Politics is turning nasty, fractious and inward-looking – with unpredictable consequences. Worst of all, many people are losing faith in democracy itself. Europe’s sluggish economies are strangled by vested interests that stifle opportunity. There is a perception that the European Union has become an instrument for creditor nations to impose their will on debtors. Many have commented on the ill-advised comments from the European Commission after the Greeks decided on parliamentary elections on 25 January 2015. Commission president Jean-Claude Juncker’s call to avoid the ‘wrong outcome’ seemed to reveal a contempt for democracy which makes a mockery of the notion of a Union that respects the sovereignty of its member-states.

“I think that the Greeks – who have a very different life – know very well what a wrong election result would mean for Greece and the Eurozone,” he said in an Austrian TV public debate in December2014. The European Commission is supposed to be answerable to the citizens of its member-states. The citizens of member-states are not answerable to the Commission and, by definition, the Commission can have no view on what is a ‘correct’ and what is a ‘wrong’ electoral outcome.

Wolfgang Schäuble, Germany’s finance minister, said in a statement: “We want to give Greece further support on its path of reform, helping it to help itself. If Greece chooses another way, it will be difficult. New elections will not change any of the agreements made with the Greek government. Any new government must keep to the contractual agreements of its predecessor.” Schäuble went on to warn Greeks not to play with fire by pressing impossible demands. “Fresh elections won’t change Greece’s debt. (…) If Greece chooses another way, it’s going to be tough,” he said.

Either Germany changes its tune, or Greece may default on its €245 billion debt. Unfortunately, the most likely outcome of this strategy is chaos since a default would certainly lead to Greece exiting the Euro. It would be unwise of Germany to underestimate the possible or likely contagion in the financial markets that would result from a Greek exit. In all sovereign debt restructuring processes, the key to success is to do it sufficiently forceful in order to eliminate all doubts about a country’s longer-term sustainability, so as to only have to go through this politically tortuous process once.

This could happen in form of a European debt conference to wipe away a portion of the debt, as happened with Germany in 1953. Greece can start afresh with private creditors, since the task of monitoring Greek fiscal accounts must shift from public to private creditors. There is no chance whatsoever of Greece, or for that matter Ireland, repaying their debts. Only the creditor nations of the north refuse to acknowledge this reality. The current set-up is completely unsustainable. There is no reason why Europe cannot recognize this unsustainable setup and make the necessary adjustments. Otherwise, the most likely winners will be populist anti-Euro and anti-EU parties who want to put an end to the Euro construct and eventually the European Union as a whole.

Professor John Ryan is Research Associate at the Von Hügel Institute of St Edmund’s College, University of Cambridge

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