Crippling austerity and a euro break-up won’t help Europe recover
Political speculation and newspaper commentary this year have concerned the possibility and consequences of a Greek exit from the euro. I have long been sceptical that this would happen, owing to its immense costs. But I felt that the austerity programme required of Greece was so unyielding that it was counterproductive. While living standards have been collapsing, the debt burden threatens to become overwhelming without credible plans to restructure it. (See here an Intelligence Squared/Google debate on austerity – which I argue is not the answer for Europe – a few months ago where I discuss the problem with, among others, George Papaconstantinou, former Greek Minister of Finance.)
Recent Greek developments have thus been modestly encouraging: a successful debt buyback, an improvement in the country’s credit rating, and a decline in government bond yields after the European Central Bank said it would again accept Greek sovereign debt as collateral. If the eurozone is to get out of this mess, it will do so this way: not by fantasies of a purportedly orderly break-up of the euro, but by structural reforms in the debtor countries that are acknowledged, rewarded and made easier.
Greece is an extreme case, and the conjunction of variables in each of the problem countries is different. In Greece, the banks were relatively strong but were undermined by a catastrophic fiscal position (in 2009, the Greek Government admitted that its budget deficit of 12.7 per cent of GDP had been vastly understated in an earlier estimate of 3.7 per cent). In Ireland, the weakness ran the other way: a banking crisis born of excessive bank lending, rather than a crisis of public debt, that then became a fiscal crisis owing to the need to nationalise the stricken banks.
What the countries have in common, despite these differing histories, is extreme stresses that turn private debt into potential public debt. And the only route out of this is to build the fiscal dimensions of the euro that were lacking at its launch, make structural reforms and adopt a more rational approach to the economics of austerity.