2/6/2015

A Greek Morality Tale by Joseph E. Stiglitz - Project Syndicate

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JosephE.Stiglitz,aNobellaureateineconomicsandUniversityProfessoratColumbia
University,wasChairmanofPresidentBillClintonsCouncilofEconomicAdvisersandserved
FocalPoints
asSeniorVicePresidentandChiefEconomistoftheWorldBank.Hismostrecentbook,coauthoredwithBruceGreenwald,READMORE
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AGreekMoralityTale
NEWYORKWhentheeurocrisisbeganahalf-decadeago,Keynesian
economistspredictedthattheausteritythatwasbeingimposedonGreeceandthe
othercrisiscountrieswouldfail.Itwouldstiflegrowthandincrease
unemploymentandevenfailtodecreasethedebt-to-GDPratio.Othersinthe
EuropeanCommission,theEuropeanCentralBank,andafewuniversities
talkedofexpansionarycontractions.ButeventheInternationalMonetaryFund
arguedthatcontractions,suchascutbacksingovernmentspending,werejustthat
contractionary.
Wehardlyneededanothertest.Austerityhadfailedrepeatedly,fromitsearlyuse
underUSPresidentHerbertHoover,whichturnedthestock-marketcrashintothe
GreatDepression,totheIMFprogramsimposedonEastAsiaandLatinAmerica
inrecentdecades.AndyetwhenGreecegotintotrouble,itwastriedagain.
Greecelargelysucceededinfollowingthedictatesetbythetroika(theEuropean
CommissiontheECB,andtheIMF):itconvertedaprimarybudgetdeficitintoa
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primarysurplus.Butthecontractioningovernmentspendinghasbeenpredictably
devastating:25%unemployment,a22%fallinGDPsince2009,anda35%
increaseinthedebt-to-GDPratio.Andnow,withtheanti-austeritySyrizapartys
overwhelmingelectionvictory,Greekvotershavedeclaredthattheyhavehad
enough.
So,whatistobedone?First,letusbeclear:Greececouldbeblamedforits
troublesifitweretheonlycountrywherethetroikasmedicinefailedmiserably.
ButSpainhadasurplusandalowdebtratiobeforethecrisis,andit,too,isin
depression.WhatisneededisnotstructuralreformwithinGreeceandSpainso
muchasstructuralreformoftheeurozonesdesignandafundamentalrethinking
ofthepolicyframeworksthathaveresultedinthemonetaryunionsspectacularly
badperformance.
Greecehasalsoonceagainremindedusofhowbadlytheworldneedsadebtrestructuringframework.Excessivedebtcausednotonlythe2008crisis,butalso
theEastAsiacrisisinthe1990sandtheLatinAmericancrisisinthe1980s.It
continuestocauseuntoldsufferingintheUS,wheremillionsofhomeowners
havelosttheirhomes,andisnowthreateningmillionsmoreinPolandand
elsewherewhotookoutloansinSwissfrancs.
Giventheamountofdistressbroughtaboutbyexcessivedebt,onemightwellask
whyindividualsandcountrieshaverepeatedlyputthemselvesintothissituation.
Afterall,suchdebtsarecontractsthatis,voluntaryagreementssocreditorsare
justasresponsibleforthemasdebtors.Infact,creditorsarguablyaremore
responsible:typically,theyaresophisticatedfinancialinstitutions,whereas
borrowersfrequentlyarefarlessattunedtomarketvicissitudesandtherisks
associatedwithdifferentcontractualarrangements.Indeed,weknowthatUS
banksactuallypreyedontheirborrowers,takingadvantageoftheirlackof
financialsophistication.
Every(advanced)countryhasrealizedthatmakingcapitalismworkrequiresgiving
individualsafreshstart.Thedebtorsprisonsofthenineteenthcenturywerea
failureinhumaneandnotexactlyhelpingtoensurerepayment.Whatdidhelp
wastoprovidebetterincentivesforgoodlending,bymakingcreditorsmore
responsiblefortheconsequencesoftheirdecisions.

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A Greek Morality Tale by Joseph E. Stiglitz - Project Syndicate

Attheinternationallevel,wehavenotyetcreatedanorderlyprocessforgiving
countriesafreshstart.Sinceevenbeforethe2008crisis,theUnitedNations,with
thesupportofalmostallofthedevelopingandemergingcountries,hasbeen
seekingtocreatesuchaframework.ButtheUShasbeenadamantlyopposed;
perhapsitwantstoreinstitutedebtorprisonsforoverindebtedcountriesofficials
(ifso,spacemaybeopeningupatGuantnamoBay).
Theideaofbringingbackdebtorsprisonsmayseemfar-fetched,butitresonates
withcurrenttalkofmoralhazardandaccountability.ThereisafearthatifGreece
isallowedtorestructureitsdebt,itwillsimplygetitselfintotroubleagain,aswill
others.
Thisissheernonsense.Doesanyoneintheirrightmindthinkthatanycountry
wouldwillinglyputitselfthroughwhatGreecehasgonethrough,justtogetafree
ridefromitscreditors?Ifthereisamoralhazard,itisonthepartofthelenders
especiallyintheprivatesectorwhohavebeenbailedoutrepeatedly.IfEurope
hasallowedthesedebtstomovefromtheprivatesectortothepublicsectora
well-establishedpatternoverthepasthalf-centuryitisEurope,notGreece,that
shouldbeartheconsequences.Indeed,Greecescurrentplight,includingthe
massiverun-upinthedebtratio,islargelythefaultofthemisguidedtroika
programsfoistedonit.
Soitisnotdebtrestructuring,butitsabsence,thatisimmoral.Thereisnothing
particularlyspecialaboutthedilemmasthatGreecefacestoday;manycountries
havebeeninthesameposition.WhatmakesGreecesproblemsmoredifficultto
addressisthestructureoftheeurozone:monetaryunionimpliesthatmember
statescannotdevaluetheirwayoutoftrouble,yetthemodicumofEuropean
solidaritythatmustaccompanythislossofpolicyflexibilitysimplyisnotthere.
Seventyyearsago,attheendofWorldII,theAlliesrecognizedthatGermanymust
begivenafreshstart.TheyunderstoodthatHitlersrisehadmuchtodowiththe
unemployment(nottheinflation)thatresultedfromimposingmoredebton
GermanyattheendofWorldWarI.TheAlliesdidnottakeintoaccountthe
foolishnesswithwhichthedebtshadbeenaccumulatedortalkaboutthecosts
thatGermanyhadimposedonothers.Instead,theynotonlyforgavethedebts;
theyactuallyprovidedaid,andtheAlliedtroopsstationedinGermanyprovideda
furtherfiscalstimulus.
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Whencompaniesgobankrupt,adebt-equityswapisafairandefficientsolution.
TheanalogousapproachforGreeceistoconvertitscurrentbondsintoGDP-linked
bonds.IfGreecedoeswell,itscreditorswillreceivemoreoftheirmoney;ifitdoes
not,theywillgetless.Bothsideswouldthenhaveapowerfulincentivetopursue
pro-growthpolicies.
SeldomdodemocraticelectionsgiveasclearamessageasthatinGreece.If
EuropesaysnotoGreekvotersdemandforachangeofcourse,itissayingthat
democracyisofnoimportance,atleastwhenitcomestoeconomics.Whynotjust
shutdowndemocracy,asNewfoundlandeffectivelydidwhenitenteredinto
receivershipbeforeWorldWarII?
Onehopesthatthosewhounderstandtheeconomicsofdebtandausterity,and
whobelieveindemocracyandhumanevalues,willprevail.Whethertheywill
remainstobeseen.

CONTACTUSTOSECURERIGHTS

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