You can't always get what you want

The limits of democracy - inside and outside a union

In mid-2015, just before Greek prime minister Alexis Tsipras’ capitulation to his official creditors, I was talking to a bond-market professional who was keen to extend his exposure in this high-risk market. “The trick is not to think of this as debt,” he said. “It’s more like equity. If you think of it like that, it’s much easier to understand and a very attractive investment”.

Since then, the difference between the interest rate demanded by investors for holding onto Greek versus German ten-year government bonds has collapsed from more than 16 to 1.3 percentage points. As a result, this evil tentacle of the “vampire squid” who was keeping Tsipras afloat by buying the debt others were dumping has probably retired to spend more time with his money.

Following Kyriakos Mitsotakis’ landslide re-election on 25 June and Tsipras’ resignation, the Greek debt crisis feels like ancient history. Taking account of a global pandemic, the structural-adjustment programme administered reluctantly by Tsipras and then enthusiastically by Mitsotakis turned a huge budget deficit into a surplus, cut the debt stock, catalysed growth, and halved unemployment.

Like any structural adjustment anywhere, it hurt. It would have hurt much less if governments of right or left had genuinely targeted tax evasion, sold more than a trickle of the assets owned by church and state, and bought fiscal leniency with ambition in tackling rent-seeking. But that would have meant antagonising individual lobbies rather than an entire population that wanted to keep the euro more than they wanted the pain to stop. For some reason, governments prefer to upset everyone more than someone.

On the creditors’ side, as exasperated as they got with the Greeks – and especially with finance rockstar Yanis Varoufakis – they too feared financial contagion and a strategic loss of Greece to the Russian camp more than they wanted their loans repaid in full. So, without spelling it out to their voters, parliaments or even – in some cases – themselves, the euro area’s government leaders and finance ministers chose to share the risks and rewards of Greece’s turnaround. Like equity investors.

Forgiven but not forgetten

It’s been 13 years since the crisis broke and, of the €260 billion lent to the Greek state, €28 billion has been repaid in full … to the International Monetary Fund. Out of the rest, the government is borrowing from the private market but more than half of outstanding debts are owed to euro-area governments via their lending vehicles: the European Stability Mechanism (ESM) and the legacy European Financial Stability Facility (EFSF). Over the years, as successive Greek governments met budgetary and reform benchmarks, they were granted debt reliefs that meant nothing – principal or interest – had to be repaid before 2030 and maturities were stretched out until 2070. Over ten years, Greek taxpayers and state beneficiaries saved €80 billion (40% of GDP) in interest payments alone. That’s on top of the €100 billion “forgiven” – not always gracefully – by the private sector in 2012.

At the onset of the crisis, Greece was running huge parallel deficits on its government and current accounts. No change would have meant permanent support from other states. The European Central Bank could have bought the unsustainable part of Greece’s public debt and written it off. After all, proportionally, it wasn’t much. That this would violate the EU’s founding treaties is almost incidental to the signal it would send to Greeks, bondholders, and every other government with politically inconvenient debt dynamics. Instead, the official shareholders gave up on getting anything more than their principal back and invested in the Greek turnaround stock. They slashed Greek governments’ annual financing costs but, in return, asked Tsipras, Mitsotakis and their successors to chip away at their debt by running consistent primary surpluses (excluding interest payments).

For Varoufakisites at home and abroad, this is debt bondage. Creditors’ forbearance may mean that Greeks pay only 3% of GDP in interest payments every year – below Italy, the UK and the US – but this comes with unacceptable leverage. Only debt forgiveness will allow Greeks their political freedom.

You can't trust people, Jeremy

This leads to the broader question of democratic constraints and the conceptual gulf between the left and the nationalist right on the one hand and ordo-/neo-liberals on the other. I think about this a lot and it’s reflected in the interviews I choose for the New Books Network including those with Marlene Wind, Signe Larsen, Ola Innset, Tom Theuns, Malte Dold and Tim Krieger. But it was my conversation this week with Joscha Abels on the politics of the Eurogroup and its focus on Greece that persuaded me to put fingers to keyboard.     

Central to his book is the argument that the Eurogroup – the club of euro area finance ministers – has locked in “an ordoliberal set of ideas that was dominant at the time of its creation" and that this "effectively limits the political scope of euro governments by removing a broad range of policy options".

To which, I say: good. Within the constraints established by bond markets - does anyone remember Liz Truss? - as well as flexible overall spending targets and the cost of borrowing set by their joint central bank, governments have substantial policy freedom. They can choose between public-spending preferences. They can focus on generating growth in output and tax revenues to expand all or some spending priorities. In a full monetary union and only a nascent fiscal union, they can even lobby to pool budgetary responsibilities for joint environmental, defence or healthcare policies. It’s undeniable that some countries proved more equal than others during the crisis by avoiding programmes but, frankly, Italy would be better-off today if it had taken one.

Defining which policy areas should be protected from capricious popular will isn’t always obvious and can lead to excessive judicial activism. But, as someone who witnessed governments setting interest rates on the basis of impending byelections, I certainly favour the handing of monetary policy to expert committees. Dirk Ehnts, an advocate of modern monetary theory, tried to convince me that lobbying by fixed-income pensioners could be relied upon to curtail inflation. If we’ve learned anything over the past two years, it should be that – when it comes to inflation – speed kills. On the economic side, I’d add the policing of competition and not putting membership of huge single markets to a popular vote. And this is before we get to the important stuff: rule of law and defence alliances.