Opinion

Obama joins the Greek chorus

US President Barack Obama’s recent call to ease the austerity imposed on Greece is remarkable – and not only for his endorsement of the newly elected Greek government’s negotiating position in the face of its official creditors.

By: Date: February 11, 2015 Topic: European Macroeconomics & Governance

US President Barack Obama’s recent call to ease the austerity imposed on Greece is remarkable – and not only for his endorsement of the newly elected Greek government’s negotiating position in the face of its official creditors. Obama’s comments represent a break with the long-standing tradition of official American silence on European monetary affairs. While scholars in the United States have frequently denounced the policies of Europe’s monetary union, their government has looked the other way.

Obama’s comments represent a break with the long-standing tradition of official American silence on European monetary affairs

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 is on the verge of cutting funding to Greek banks. The guardians of financial stability are amplifying a destabilizing bank run.

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.”

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, recognized 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.  

Recent analysis shows that forgiveness of Greece’s official debt is unambiguously desirable

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.

Debt forgiveness benefits creditors as much as it helps debtors.

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 materialize, political discontent will spread, extremist forces will gain strength, and the survival of the European Union itself could be endangered.

This article was originally published on Project Syndicate 

Read more:

Retaking the Greek test

Greece to the Eurozone’s rescue

Special Eye on Greece section


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to communication@bruegel.org.

View comments
Read article More on this topic

Opinion

Will China’s trade war with the US end like that of Japan in the 1980s?

The outcome of the US-China trade war is anticipated to be quite different from the experience of Japan in the 1980s and 1990s, due to China’s relatively lower dependence on the US and having learned from the Japanese experience.

By: Alicia García-Herrero and Kohei Iwahara Topic: Global Economics & Governance Date: May 13, 2019
Read article More on this topic

Opinion

Life after the multilateral trading system

Considering a world absent a multilateral trading system is not to promote such an outcome, but to encourage all to prepare for the worst and instil greater clarity in the mind of policymakers as to what happens if compromise fails.

By: Uri Dadush and Guntram B. Wolff Topic: Global Economics & Governance Date: April 25, 2019
Read article More by this author

Opinion

Europe and the new imperialism

For decades, Europe has served as a steward of the post-war liberal order, ensuring that economic rules are enforced and that national ambitions are subordinated to shared goals within multilateral bodies. But with the United States and China increasingly mixing economics with nationalist foreign-policy agendas, Europe will have to adapt.

By: Jean Pisani-Ferry Topic: Global Economics & Governance, Innovation & Competition Policy Date: April 3, 2019
Read article More on this topic More by this author

Opinion

Takeaways from Xi Jinping’s visit to France and Italy and ideas for the EU-China summit

The author appraises China's strategy towards Europe ahead of next month's EU-China summit.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: March 27, 2019
Read article More by this author

Blog Post

The Economists’ Statement on Carbon Dividends and the Green New Deal

In the last month two prominent policy proposals that aim to combat climate change have been presented in the United States. The Green New Deal calls for the deployment of substantial government resources to combat climate change. The Economists’ Statement on Carbon Dividends, suggests a market-based and budget-neutral approach through a carbon tax. Michael Baltensperger reviews reactions to both.

By: Michael Baltensperger Topic: Energy & Climate, Global Economics & Governance Date: February 25, 2019
Read article More on this topic More by this author

Blog Post

After the ESM programme: Options for Greek bank restructuring

With the end of the Greece support programme, authorities now have scope to focus on the legacy of NPLs and excess private-sector debt. Two wide-ranging schemes are under discussion. They should be assessed in terms of required state support, likely investor appetite for problematic bank assets, and institutional capacity to manage a complex new organisation tasked with debt restructuring.

By: Alexander Lehmann Topic: European Macroeconomics & Governance Date: January 29, 2019
Read article Download PDF More on this topic More by this author

Essay / Lecture

A new statistical system for the European Union

Quality statistics are essential to economic policy. In this essay, Andreas Georgiou demonstrates the existence of fundamental risks inherent in the European Statistical System. He argues that a paradigm shift is necessary and sets out a model that would deliver the quality statistics the European Union needs.

By: Andreas Georgiou Topic: European Macroeconomics & Governance Date: December 12, 2018
Read article More on this topic More by this author

Opinion

Immigration: The doors of perception

Surveys show that people systematically overestimate the share of foreign-born citizens among resident populations. Aligning people's perceptions with reality is vital to the betterment of public debate and proposed policies.

By: Inês Goncalves Raposo Topic: Global Economics & Governance Date: December 12, 2018
Read article More on this topic More by this author

Opinion

The great macro divergence

Global growth is expected to continue in 2019 and 2020, albeit at a slower pace. Forecasters are notoriously bad, however, at spotting macroeconomic turning points and the road ahead is hard to read. Potential obstacles abound.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: December 5, 2018
Read article More on this topic More by this author

Blog Post

The United States-Mexico-Canada free trade agreement (USMCA)

While final ratification of the USMCA (also known as Nafta 2.0) is pending, we review economists’ assessment of the agreement.

By: Silvia Merler Topic: Global Economics & Governance Date: October 22, 2018
Read article More on this topic More by this author

Opinion

Greece: What to expect after the bail-out

After being under the close scrutiny of three financial assistance programmes since May 2010, Greece has finally left the bail-out in August 2018. How different is the post-bail-out era from the preceding eight years? Will Greece be able to stand on its own? And how might the country improve its economic outlook? In this post, which summarises a presentation recently given at an Athens conference, the author answers these three questions.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: October 9, 2018
Read article More on this topic

Opinion

The ECB is compromising the attractiveness of euro-area sovereign bonds

The ECB should refine its collateral framework in order to continue protecting its balance sheet without putting at risk the safe-asset status of sovereign bonds of the euro area.

By: Grégory Claeys and Inês Goncalves Raposo Topic: Finance & Financial Regulation Date: August 29, 2018
Load more posts