Greece is following the road taken by several other crisis-ridden emerging economies over the past 30 years. Indeed, as I argued earlier this year, there are stunning similarities between this once-proud eurozone member and Argentina prior to its default in 2001. With an equally traumatic implosion – economic, financial, political, and social – now taking place, we should expect heated debate about who is to blame for the deepening misery that millions of Greeks now face.There are four suspects – all of them involved in the spectacular boom that preceded what will unfortunately prove to be an even more remarkable bust.
Many
will be quick to blame successive Greek governments led by what used to
be the two dominant political parties, New Democracy on the right and
PASOK on the left. Eager to borrow their country to prosperity, they
racked up enormous debts while presiding over a dramatic loss of
competitiveness and, thus, growth potential. Some even sought to be
highly economical with the truth, failing to disclose the true extent of
their budgetary slippages and indebtedness.
Having
borrowed far too much after joining the eurozone in 2001, New Democracy
and PASOK let their citizens down when adjustments and reforms were
needed after the 2008 global financial crisis. An initial phase of
denial was followed by commitments that could not be met (indeed, that
some argued should not be met, owing to faulty program design).
The resulting erosion in Greece’s international standing amplified the
hardship that citizens were starting to feel.
Greece’s
private creditors were more than happy to pour money into the country,
only to shirk their burden-sharing responsibilities when the artificial
boom could no longer be sustained. The over-lending was so widespread
that at one point it drove down the yield differential between Greek and
German bonds to just six basis points – a ridiculously low level for
two countries that differ so fundamentally in terms of economic
management and financial conditions.
Overeager
creditors willingly underwrote this absurd risk premium. Yet, when it
became abundantly clear that Greece’s debt burden had been taken to
insolvency levels, creditors delayed the moment of truth. They dragged
their feet when it came to the critical agreement on orderly
burden-sharing (that is, acceptance of a “haircut” on private-sector
claims on Greece). And the longer they did that, the more money left
Greece without any intention of returning.
But
neither the Greek government nor its private creditors acted in a
vacuum. Both took comfort from the political cover provided by the
European unification effort – an historic initiative aimed at securing
the continent’s well-being through closer economic and political
integration on the basis of credible rules and effective institutions.
On
both counts – rules and institutions – the eurozone fell short of what
was required. Remember, the large core economies (France and Germany)
were among the first members to breach the budgetary rules that were
established when the euro was launched. And European institutions proved
toothless when it came to enforcing compliance. All of this served to
sustain the fantasy world that both Greece and its creditors happily
inhabited for far too long.
Europe
also failed to react properly when it became obvious that Greece was
starting to teeter. European government counterparts failed to converge
on a common assessment of the country’s problems, let alone cooperate on
a proper response. While they grudgingly loosened their purse strings
to support Greece, the underlying motives were too shortsighted, and the
resulting approach was strategically flawed and abysmally coordinated.
Finally,
there was the International Monetary Fund, the institution charged with
safeguarding global financial stability and being a trusted adviser to
individual countries. It appears that the IMF succumbed too easily to
political pressures during both the boom and the bust. Political
expediency seems to have trumped analytical robustness, undermining both
the Fund’s direct beneficial role and its function as a policy and
financial catalyst.
On
the surface, each of the four suspects has an individual case for
arguing that the finger of blame should be pointed elsewhere. They could
even argue that, at worst, they were uninformed accomplices. But that
is not really right.
None
of the four can avoid the reality that Greece’s collapse would not have
occurred had they not been complacent during the boom and,
subsequently, fulfilled their responsibilities during the bust so
poorly. They sucked each other into a sense of false prosperity, only to
trip each other up during the inevitable downturn. Now, one hopes, all
four will be held properly accountable by their stakeholders and
undertake serious self-evaluation.
Most
likely, they will end up getting off too easy, especially compared to
the real victims of this historic tragedy – the most vulnerable segments
of the Greek population, who will become much worse off, today and for
many years to come, as jobs disappear, savings evaporate, and
livelihoods are destroyed. And they may not be alone. Millions of others
may experience collateral damage, as financial contagion risks
spreading to other European countries and to the global economy as a
whole.
In
a fairer world, these vulnerable citizens would be entitled to claw
back the salaries, official privileges, and bonuses that the four
parties to blame enjoyed for too long. In the world as it is, they are a
compelling lesson for the future.
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