Debt, Greece, and Democracy

3 minute read

Joseph Stiglitz recently wrote in the Guardian how the European Union and International Monetary Fund’s treatment of Greece was anti-democratic.  I disagree, because the current ‘Grexit’ crisis is not a bug, but a feature of the political and democratic process of the European Union. Stuck between stubborn pensioners and angry non-Greeks, the government of Greece and leaders of the European Union are stuck in a zero-sum fight that promises no winners.

Greeks at a referendum protest, source: AP photo/Emilio Morenatti

What exactly is happening?

With the consolidation of the European monetary union, most members of the European Union gave up their individual ability to manipulate their money supply to the supranational organization, the European Central Bank. As a result, this heavily constrains the ability of any E.U. monetary member to pursue excessive government deficits without the explicit consent of the ECB, and by extension, other E.U. nations.

Fast forward to 2015, add in out of control public spending, institutionalized tax evasion, corruption, and you have Greece.

A member of the European Union since 2000, in 2010 regulators discovered that Greece was at the brink of insolvency due to hidden debts it had incurred through banks such as Goldman Sachs. Consequentially, the European Union believed that bailing out the Greeks was necessary, and together with the International Monetary Fund, out on severe conditions of austerity reforms.

Since the initial bailout (and another in 2011), Greece has seen moderate success in restructuring its economy, but ultimately fell short of the severe austerity demands of its creditors. Come 2015 elections, and Syriza, a fringe leftist government, accomplished a landslide election on an anti-austerity, anti-Troika (a pejorative for the EU, IMF, and European commission), and Greek solidarity platform. Greece’s new leaders, Prime Minister Alexis Tsipras and Finance Minister Yanis Varoufakis, have since campaigned on the horrible mistreatment of Greece’s people and its economy.

Tsipras and Varoufakis, source: EPA

Not so fast

However, this struggle is not as black and white as Tsipras and Stiglitz want you to think. While Greece has made many reforms since 2010, its public pensions and state enterprises still dwarf those of its poorer Eastern European Union neighbors. Countries like Lithuania have average public pensions that are less than one-third the size of their Greek counterparts, and their leaders have remained among the greatest critics of Greece’s government.

Making matters more complicated, other European nations that were recently bailed around 2010 (Ireland, Portugal, Italy, and Cyprus) all enacted the desired austerity measures and reforms from creditors, and have since made successful economic recoveries.

These differences in the European Union leads to a greater point, and my criticism of opinions like Stiglitz and Tsipras. As Jeffrey Sachs, a notable economist a Columbia University, said yesterday, Europe remains largely fragmented along nationalistic lines. European leaders are at odds with Greece’s government not because of some inner sadistic desire, but because their national constituents are fed up with financing the excesses of Greece’s economy and government.

The European Union, despite achieving much success with integration, still has its problems. A unified polity, or lack of, remains one of its largest weaknesses. Following this failure, debates over bailouts, debt, and economic reforms will remain at the whim of largely conflicting public and special interests. This is about as democratic as the federalist European Union can get. As I said at the beginning, this is a feature, not a bug.

Bailouts in the eyes of non-Greeks appear as a waste of European money on a nation with leaders that pride themselves on political brinkmanship, a party that is Euro-sceptic, flirts with Russia for aid, and has no real plans for long term restructuring of its public expenses. Unfortunately for Greece, it does not make up the majority of Europe and will not be winning the public opinion contest.

Kal's Cartoon in the Economist

Despite their short fallings, Stiglitz et al. are right that, at this point, some debt forgiveness is necessary for a stable Greece and European Union. The barrier to this, however, is Stiglitz’s accursed democracy.