Greek debt disaster bodes ill for daily life

By Pavlina Tcherneva
Cross posted from Al Jazeera

“There are red lines in the sand that will not be crossed,” Greek Prime Minister Alexis Tsipras said just weeks ago as he began the long negotiations process with creditors.

Some of these lines included no more pension cuts or value-added tax (VAT) increases, and a debt restructuring deal that incorporates renewed economic assistance from Europe. Tsipras has been working to complete the previous government’s austerity commitments, without any guarantee of a meaningful debt reprieve in the future.

Yet on Monday, he crossed his own previous red lines and offered a round of fresh austerity measures worth 7.9 billion euros ($8.9 billion) — the largest to date — which in turn prompted mass protests at home.

Crafted by the Greeks, an agreement seemed close at hand, but was nevertheless rejected by the International Monetary Fund and Greece’s euro partners at the European Commission and European Central Bank. The fiscal tightening that is currently being discussed is on the order of 2 to 3 percent of gross domestic product (GDP), comparable to that at the peak of the crisis in 2010.

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4 Responses to Greek debt disaster bodes ill for daily life

  1. No call for monetary sovereignty. Disappointing.

  2. Andrew Hartman

    Dear Dr. Tcherneva,
    You write, “For any given economy, one sector’s surplus is equal to another sector’s deficit. And in the case of Greece, if the government budget deficit continues to fall drastically or even move into surplus, that should mean that the non-public sector surplus (the net savings of Greek households and firms) will also fall rapidly.” I understand that diminishing Greece government spending of borrowed money or even the creation of a surplus (especially one that is spent to pays creditors) diminishes demand, but I don’t understand calling Greece an “economy.” Isn’t the EU an economy with a currency issuer that has chosen not to issue more currency than it destroys through taxes? Greece can only spend what it taxes or borrows and it can’t borrow very easily. Isn’t the real demand destroyer that the EU won’t spend euros in Greece to fund pensions, etc?

    • “Isn’t the real demand destroyer that the EU won’t spend euros in Greece to fund pensions, etc?”

      I think that’s right; unfortunately it seems no one will listen to the basic point that you can’t have a US-style state system without a federal government to write checks to individuals on something like a per capita basis (which we do in the US in the form of Social Security/Medicare.)

      The question always seems to be the myopic “what should be done about Greece?” (or Portugal or Italy or whichever country is in the news) and never “how can the Euro be reformed so that it does not experience these rolling debt crises?”

      It is very easy to see that, say, Wyoming would be in a lot of trouble if it had to borrow the net federal dollars it takes in every year – something like $1000 per person. Over the course of 20 years it would wind up $10bn in debt with no way to ever pay the money back, with journalists tut-tutting about “irresponsible” Wyoming budgets…

      But since we have a federalized pension system, along with the other check-writing functions of the US treasury, no one notices that Wyoming is getting all this money. It’s just baked into the system. Voters in New York aren’t being told they are being ripped off by Wyoming’s profligacy.

      Wray (I believe) has at various times called for the ECB to simply make block grants to the member states on a per capita basis as a means of relieving these debt problems. This approach would eliminate moral hazard (since all states, not just distressed states, get a benefit) and create at least an approximation of the federal tier of spending that makes the US system work. Unfortunately this idea has never penetrated very far into the discourse and remains unexamined.

  3. Why are they even negotiating? Why no issue own currency? Head of the IMF said she does not car about Greeks until they are as poor as people in the developing countries. This is the level of care. They are just destroying Greece.