Here’s What’s at the Heart of the Crisis in Greece


If you’re in the market for some interesting commentary on Greece, there have been a couple of good ones recently. The first comes from Paul Krugman, who, among other things, makes a point that often gets missed: Greece is already running a primary surplus. That is, they’ve cut spending enough over the past few years that their budget would be balanced if it weren’t for interest payments on their gigantic debt. What’s more, their primary surplus is slated to rise to 4.5 percent in the future:

If Greece were to adhere totally to the previous terms, over the next five years it would make resource transfers of about 20 percent of one year’s GDP. From the point of view of the creditors, that’s a trivial sum. From the point of the Greeks, however, it’s crucial; the difference between a primary surplus of 4.5 percent of GDP and, say, 1.5 percent of GDP for the Greek economy and the welfare of its citizens is huge. The only reason for the creditors to play hardball would be to make Greece an example, to discourage other debtors from trying to negotiate relief.

In other words, the EU is demanding that Greece not just balance its budget, but run a large surplus that it will mostly send to large countries for whom it’s a trivial sum. For Greece, though, it’s a huge sum, the difference between years of penury and a return to growth. This is at the heart of the conflict between Greece and the EU.

The second commentary comes from Daniel Davies, who makes the point that Greece’s gigantic debt doesn’t really matter as debt. Everyone knows Greece will never be able to pay it back. But if everyone knows this, why are Germany and the rest of the EU so hellbent on refusing to write it off?

Don’t think of the Greek debt burden, either in cash € terms or as a ratio to GDP, as an economic quantity. It basically isn’t an economically meaningful number any more. The purpose of its existence is as a political quantity; it’s part of the means by which control is exercised over the Greek budget by the Eurosystem. The regular rituals of renegotiation of the bailout package, financing of debt maturity peaks and so on, are the way in which the solvent Euroland nations exercise the kind of political control that they feel they need to have if they are going to be fiscally responsible for the bills.

….It is, therefore, totally inimical to the Eurosystem to hold out any hope of the kind of debt writedown that Syriza wants, as opposed to some smaller, cosmetic face value reduction or maturity extension. The entire reason why Syriza wants to get a major up-front reduction in the debt number is to create political space to execute the rest of their program. The debt issue and the political issue are the same issue. Syriza understands this, and so does the Eurosystem.

In other words, Greece doesn’t want to run a large budget surplus. They want to increase government spending in order to dig their way out of their massive economic depression. The rest of the EU wants no such thing. They’re afraid that if they let Greece off the hook, then (a) everyone else will want to be let off the hook, and (b) Greece will go right back to its free-spending ways and soon require another bailout. If the price of that is years of pain and unemployment, so be it.

There’s more at both links, and both are worth reading.

One More Thing

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