Greece – Which Way Forward?

Published on 2015/02/03

Moderate politicians across the ages have always underestimated the irrational momentum of ideologists. For one thing, this is because they themselves are used to thinking along more or less rational lines. Secondly, it is quite normal for them to ignore their campaign promises once they are in office. So they project their own behaviour – mistakenly so – onto ideologists like Alexis Tsipras and his economics professor from the radical-left.

History teaches us: Whenever extreme ideologists were about to seize power, moderate politicians always calmed their nerves by arguing that “things won’t be as bad as they sound now.” Once in power, or so they hoped naively, the extremists would come to their senses and back away from their twisted theories. They expected realistic policies to take the place of campaign-trail bombast.

For European policymakers, the time has come to wake from their daydreams. The new extremist government of Greece has already proven them wrong. Nothing suggests that it will tone down its rhetoric and seek compromise. Instead, it has rehired thousands of redundant civil servants in a show of defiance, raised the minimum wage, halted the privatisation process, kicked the so-called troika composed of IMF, ECB, and EU representatives out of the country, and made overtures to Russia in the hope its autocratic regime will rush to the country’s rescue as it teeters on the brink of the abyss.

So where do we go from here?

  1. The worst thing to do for European policymakers would be to cave in out of weakness and to meet the extremist Greek Government halfway. It would send the wrong signal to the extreme left in Spain and elsewhere. For it would suggest that it pays to be impudent and break your contracts. It would encourage copycat behaviour: “Let’s vote the extreme left into office, and snub the EU – they will come crawling and lay new billions at our doorstep, even if we roll back half-finished reforms.”
  2. I do hope that EU policymakers will muster the courage to defy these attempts at blackmail, and to suspend payments to Greece immediately. Of course, this would trigger a sovereign default. Historically speaking, there have been more sovereign defaults than you would think. The financial economists Carmen M. Reinhart and Kenneth S. Rogoff counted no less than 250 sovereign defaults since the year 1800 and at least 68 defaults on domestic public debt where the savings of the domestic population in the national currency is wiped out. Heading the list is Spain with 13 defaults, followed by Venezuela with ten. Only a few of the larger countries have never defaulted, including the United States, Canada, Australia, Sweden and Norway. Equally interesting is the length of the periods in default: Greece has been insolvent for more than half of its modern history. This means a sovereign default would be nothing out of the ordinary for Greece. But for other countries in southern Europe, a Greek sovereign default could be a wake-up call. For it would become perfectly obvious that money lent to Greece is irretrievably lost. Which it is anyway. No one in their right mind ought to believe what they are being told by Finance Minister Schäuble or Chancellor Merkel, to wit, that Greece will eventually repay its debts.

The bankruptcy of Greece would hardly put an end to the crisis in the EU, though. The issues plaguing countries like France and Italy are as dramatic as ever. Francois Hollande is admittedly not quite as radical as Alexis Tsipras. But he has manoeuvred France into a precarious situation with his socialist, anti-business policy. But during Hollande’s time in office, France has increasingly devolved into the problem child of Europe. In the case of Hollande, many of his more naive contemporaries were convinced that his primitive leftist campaign slogans (“I don’t like the rich,” 75% wealth tax) were just hot air, and that he would tackle the urgently needed reforms after taking office – the way Gerhard Schröder did in Germany in his day. I for one cautioned well in advance of Hollande’s victory not to be naive.

Greece is, sadly, little more than a particularly drastic symptom of a general malaise in Europe: The European welfare state has long reached its limits. The distribution of social benefits on borrowed money, to which policymakers and voters have gotten so used to over the decades, cannot be sustained indefinitely.

The situation in Greece is even worse: In a globalised world, a country without a functional economic business model and without a functional administration must accept the fact that it is not entitled to a comparatively high standard of living by virtue of the fact alone that it happens to be geographically located in Europe. We live in a day and age of very rapid changes, in which formerly developing countries experience economic ascendency and surging standards of living. It has almost come to the point where everyone competes with everybody else on this planet. The rise and fall of nations has been a constant in the annals of mankind. While these cycles may have taken centuries at one time, they have dramatically accelerated lately. I am well aware that it must be hard for people living in Greece to accept this reality and to come to terms with the fact that there is no guarantee or entitlement to the same standard of living they had 20 years ago, and which other European countries continue to enjoy (for the time being).

It is the difficulty to accept this that made the Greeks vote a party into power that refuses to accept the facts. Reality hardly qualifies as an argument for ideologists. Whenever reality and ideology are at odds, they respond by saying: “That’s just too bad for reality!” Unless you understand this mindset of extreme ideologists, you won’t comprehend what happened in Greece last week.

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