Opinion

The Greeks voted to end their national humiliation. Now it's time for Europe to cut them a better deal.

The great European project can still be saved

This weekend, the Greek people voted in a referendum on whether to accept the terms of the latest bailout offer from the eurozone brass. The offer had been withdrawn by the time of the vote, but Greeks voted to reject it anyway, by a nearly 23-point margin, showing that bald threats from top eurozone elites had backfired spectacularly.

So despite being technically pointless, the vote stood as a good indicator of Greece's current feeling towards domination by the bungling European Union elite: two raised middle fingers, held high. The political action now turns to that same elite. Will they continue to bludgeon the Greek people with austerity, or cut them a better deal?

The background of this situation is the extremely technical debate around what Greece might do with its eurozone membership. While Greece probably cannot legally be forced out of the eurozone or the EU, the European Central Bank could effectively destroy its existing banking system by withdrawing all liquidity support. On the other hand, just as Panama or Zimbabwe cannot be prevented from using U.S. dollars as their de facto national currencies, Greece cannot be stopped from using euros.

But in truth, the debate now turns on perceived merit and desert, and barely at all on the facts of economics or finance. On this question, surely there is much blame to go around, even for Greece and its governing Syriza party. But in Europe at least, the blame has been almost entirely one-sided. Steve Randy Waldman has the best summary of the problem that I've read:

It is not the absence of pain and blame that troubles me, but its asymmetry. What was required was a Europe-wide solution to a European problem. What occurred, in my opinion, was the quarantining of a scapegoat... [L]eaders chose to inflame national stereotypes. They pretended that there were villains and angels, and that they (and their own constituents, of course) were the angels. [Interfluidity]

As part of this self-exculpation, euro elites constantly whine about how generous they have been with loans to Greece. It's nonsense. Paul Krugman recently pointed to an apposite example of what a truly generous "interstate" bailout looks like — the rescue of Texas during the savings and loan crisis of the late 1980s. That involved a straight-up transfer — not a loan — of about $75 billion, or 25 percent of Texas GDP.

Back then, it barely occurred to anyone that this was a reason to punish Texas for its large-hatted misdeeds — the rescue happened automatically, as a part of federal deposit insurance. That's a big part of why the dollar works as a currency — and why the euro does not.

More fundamentally, as economist Thomas Piketty pointed out in a heated interview with the German paper Die Zeit, excessive debt is a problem that has been endemic to human affairs for thousands of years. Through some combination of excessive borrowing, irresponsible lending, or general economic crisis, any individual, business, or state can end up with unpayable debts. Bankruptcy is thus a basic feature of a well-ordered society, not some moral abomination.

When it comes to sovereign debt, the lesson of the Treaty of Versailles was that it is madness to bludgeon nations into repaying impossible debts. By forcing an enormous repayment, the Western allies crushed the German economy and fueled political radicalism (read: Hitler).

The current European fixation with austerity doesn't even make sense on its own terms, since spending cuts and tax increases shrink the economy about as fast as they reduce debt. "If Germany is to be 'milked," as John Maynard Keynes once wrote, "she must not first of all be ruined."

About the only state that has actually undertaken the "responsible" route of a very large debt repayment is Great Britain, which slowly worked off its Napoleonic War debts over many years. But that took an entire century, and occurred at a time when Britain was by far most powerful state in the world, both economically and militarily (and incidentally, also thus maintained several generations of idle rich in splendor). Probably not even the United States could manage such an operation today.

Partial default and debt restructuring are a far more sensible option, one of which Germany has availed itself many times, most recently in 1990. By arranging so that both creditors and debtors take a hit, nations can be set back on their feet and not be strangled indefinitely by the dead hand of the past.

Since financial and economic mismanagement were to a great degree responsible for World War II, this used to be considered common sense. But European elites are drowning the lessons of history in a swirl of derp and xenophobia.

But it's not too late. The reality, even at this late date, is that it would be extremely easy and fairly cheap to bind up Greece's wounds and restore prosperity to the eurozone. Instead of viewing Greece as a rebelling serf who must be cudgeled lest he inspire more unrest, the recent vote could be a convenient excuse to pivot policy and fix massive economic problems across the entire eurozone. I would bet money against it, but it's still possible.

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