Those who criticize the euro or how it is managed have long run the risk of being dismissed as Anglo-Saxons or, worse, anti-Europeans. British prime minister Margaret Thatcher accurately foresaw the folly of a European monetary union. Gordon Brown, as British chancellor of the exchequer, followed in Thatcher’s footsteps. When his staff presented carefully researched reasons for not joining the euro, many Europeans sneered.
And that is why Obama’s statement was such a breath of fresh air. It came a day after German chancellor Angela Merkel said that Greece should not expect more debt relief and must maintain austerity. Meanwhile, after days of not-so-veiled threats, the European Central Bank (ECB) is on the verge of cutting funding to Greek banks. The guardians of financial stability are amplifying a destabilizing bank run.
Obama’s breach of Europe’s intellectual insularity is all the more remarkable because even the International Monetary Fund has acquiesced in German-imposed orthodoxy. As IMF managing director Christine Lagarde told the Irish Times: “A debt is a debt, and it is a contract. Defaulting, restructuring, changing the terms has consequences.”
Recent analysis shows that forgiveness of Greece’s official debt is unambiguously desirable
The fund stood by in the 1990s, when the eurozone misadventure was concocted. In 2002, the director of the IMF’s European department described the fiscal rules that institutionalized the culture of persistent austerity as a “sound framework.” And, in May 2010, the IMF endorsed the European authorities’ decision not to impose losses on Greece’s private creditors – a move that was reversed only after unprecedented fiscal belt-tightening sent the Greek economy into a tailspin.
The delays and errors in managing the Greek crisis started early. In July 2010, Lagarde, who was France’s finance minister at the time, recognised the damage incurred by those initial delays, “If we had been able to address [Greece’s debt] right from the start, say in February, I think we would have been able to prevent it from snowballing the way that it did.” Even the IMF acknowledged that it had been a mistake not to impose losses on private creditors preemptively; it finally did so only in June 2013, when the damage had already been done.
There is plenty of blame to go around. Former US treasury secretary Timothy Geithner championed a hardline stance against debt restructuring during a crisis. As a result, despite warnings by several IMF Directors in May 2010 that restructuring was inevitable, the US supported the European position that private creditors needed to be paid in full.
Lee Buchheit, a leading sovereign-debt attorney and the man who managed the eventual Greek debt restructuring in 2012, was harshly critical of the authorities’ failure to face up to reality. As he put it, “I find it hard to imagine they will now man up to the proposition that they delayed – at appalling cost to Greece, its creditors, and its official-sector sponsors – an essential debt restructuring.”
Obama may have arrived late to the right conclusion, but he expressed what should be an obvious truth: “You cannot keep on squeezing countries that are in the midst of depression.”
If Obama’s words are to count, he must continue to push for the kind of deal Greece needs – one that errs on the side of too much debt forgiveness, rather than too little. Recent analysis shows that forgiveness of Greece’s official debt is unambiguously desirable, as another bogus deal will keep the Greek economy depressed, ensuring that the problem soon recurs. If European sensitivities must be assuaged, Greece’s debt repayment could be drawn out over 100 years.
At the end of the day, debt forgiveness benefits creditors as much as it helps debtors. Creditors have known this since at least the sixteenth century, when Spain’s King Philip II became the world’s first known serial sovereign defaulter. As Jesus put it, “It is more blessed to give than to receive”.
European authorities must come to understand that the next act of the Greek tragedy will not be confined to Greece. If relief fails to materialise, political discontent will spread, extremist forces will gain strength, and the survival of the EU itself could be endangered.
Ashoka Mody, a former mission chief for Germany and Ireland at the IMF, is currently visiting professor of international economic policy at the Woodrow Wilson School of Public and International Affairs, Princeton University
Copyright: Project Syndicate, 2015