GREECE’S unsustainable debt of over 171 per cent of GDP is a self-inflicted crisis caused by the absence of fiscal probity and fiscal management.
The debt situation was contributed to by careless risk lending and investing. aggravated by the fallout from the global financial crisis and further compounded by the austerity policies which were used to bring the debt and fiscal deficit under control.
None of this was helped by the attitude of the political leadership in Greece which was unwilling to meet the conditions of repayment agreed to, albeit under duress.
By early 2010 managing the sovereign debt crisis of Greece was an urgent item of interest for the European Union because a default by Greece could trigger a financial crisis that would seriously impair the banking system throughout Europe, leading to the collapse of the euro.
This prompted the European Central Bank, with the support of the International Monetary Fund and solvent European countries, to collaborate in designing and financing a rescue package. In May 2010, this troika launched a ¤110-billion loan to bail out Greece from impending default on sovereign debt and assist in meeting its anticipated financial needs until June 2013.
The accompanying austerity measures caused social unrest and political upheaval, leading to the demise of a government that was doing its best to honour the conditions imposed by its creditors.
An unsustainable debt situation inevitably means that borrowing is no longer possible and substantial fiscal cutbacks including reduction in government social services, increased taxation, termination of subsidies, sale of government assets and privatisation have to be implemented. The result is sudden and sharp deflation of the economy.
The ultimate solution to debt and deflation is economic growth, but the fundamental dilemma is that austerity cannot produce economic growth, so the pain and social sacrifice are in vain. If this goes on long enough it mutates to social and political turmoil.
There has never been political revolution in which the economic hardship of the masses was not a decisive factor; therefore, the inevitable austerity must be well-timed and socially feasible. If not it leads to political chaos and then political extremism.
In his The Economic Consequences of The Peace published in 1919, Maynard Keynes predicted that the excessive debt payments imposed on Germany by the victors in World War I would lead to austerity and depression, not economic recovery. The economic hardships caused by the reparations was instrumental in causing what the Reich called the “the mass psychology of fascism” which was receptive to the emergence of Hitler and Nazism in Germany.
It is amazing that Germany, after such a bitter experience, should now be insisting on austerity measures in Greece, rather than supporting a restructured package to alleviate the stifling debt.
The victors in World War II did not repeat their mistake of World War I. Germany never had to pay even a small part of the imposed war reparations. These debts were cancelled and instead the United States mounted the Marshall Plan to ensure its economic recovery.
The US did it for self-interest to prevent the takeover of Western Europe by communism. Germany needs to realise that it is in its self-interest to support, by financial means if necessary, the economic recovery of Greece.