More debt might just be the medicine Greece needs

Blessed are the bean counters? New investment in Greece could drive development. David Dennis, CC BY-SA

One thing seems certain about the outcome of Greece’s tortured negotiations which Europe and its creditors: no one is going to leave the table entirely satisfied. Fears of a Grexit still linger, emergency meetings come and go, and the politics of debt leave a sour taste.

It might seem odd, then, to suggest that more debt might be the solution Greece needs; it’s only a matter of the right debt, for the right motives.

The situation might have been very different of course if in 2010 Greece had been allowed to default on its debt, with, probably, catastrophic consequences for the European private banking sector. However, let’s not dwell upon that. Previous Greek governments have their share of responsibility for such high levels of debt, while at the same time European institutions have their share of responsibility for the high rates at which Greece had to borrow at the time.

In my view, the time is right to discuss what kind of Europe we want for ourselves and for the future generations. I argue this, because in my opinion, Greece could only be the beginning of a series of problems that Europe will have to face in the near future.

Transferring the wealth

It is useful, as a beginning, to go as far back as the Bretton Woods Conference of 1944. It was then when John Maynard Keynes quickly identified that within a common currency area we cannot have both an appreciation of the common currency for countries which run a trade surplus and a depreciation of the common currency for countries which run a trade deficit. In this respect, many academics including the current Greek finance minister Yanis Varoufakis, put forward the argument that in order to alleviate these trade imbalances, a mechanism is required to transfer wealth from the surplus countries to the deficit ones.

Making the partnership work. Patrick Seeger/EPA

The key, though, would be not to increase taxes in surplus countries, but for surplus countries to make gainful investments in both the public and the private sector of the deficit countries. Now, countries which are running a trade deficit tend to be running a budget deficit at the same time, and this means that any negative economic shock can hit hard. That can then force the deficit country to cut back both spending and borrowing, thus entering a phase of debt deflation and further economic problems.

I subscribe to the belief that this is currently the situation in Europe. I side with those who argue that we have surplus and deficit countries and we also lack of a mechanism to redistribute wealth. This scenario presents a powerful opportunity.

Investment case

Now is the moment for institutions such as the European Investment Bank (EIB) or the European Regional Development Fund (ERDF) to play an active role. In the case of Greece, bonds could be issued, surplus countries could buy these bonds and then specific sectors of the Greek economy could be chosen for a series of money-making investments. This would allow the country to rejoin a development path that would enable it to repay its debts. Otherwise, we are labouring under an unrealistic idea that debt repayment can somehow precede growth; this just doesn’t work.

Risk abounds. A game with no winners under the existing rules. Tambako The Jaguar, CC BY-ND

However, these days Europe is promoting a different agenda: fiscal consolidation, mainly through unrealistic budget surpluses supported by high taxation and cutbacks in spending; and competitiveness, mainly through deregulated markets and lower wages. We could again revert back to Keynes to argue that competitiveness is not so much a matter of lower wages as it is a matter of productivity and technological innovation. If the will was there, then the EIB or ERDF investments could specifically aim at improving productivity and technological innovation in specific sectors of the Greek economy.

The persistent call from European institutions, however, is one of austerity. The latest discussions have been marked by an insistence on continued cutbacks and higher taxation. But to what end? Do not deceive yourselves; austerity does not imply tidying up. Austerity leads to deflation and then the economy is again caught up in a vicious cycle of stagnation, leaving the country unable to achieve budget surpluses and repay its debt. This should not be the way for Europe.

Trading up

It is worth noting here that a great proportion of exports from European trade-surplus countries is designated for the European market. So what will happen if European countries have no income to spend in order to buy these products? Helping the poor might indeed be necessary to help the rich. The common currency area is a Union; it is not a club where some members are more privileged than others. It should be understood that all of the countries of the Eurozone are faced with the same problems. Perhaps the model of the United States could be followed, where Washington is responsible for providing financial assistance to states in trouble.

In the case of Greece, there is no doubt that plenty of structural reforms are required. The roll call of pressure points includes early retirement privileges for some, undeclared labour, idle parts of the public sector, and legislation to facilitate privatisations and liberalisations. These are all responsibilities of the current Greek government and it is indeed imperative that they take place as soon as possible. However, at the same time the weakest portion of the Greek population has to be protected and respected and viable solutions have to be put forward.

If Greece exited the euro it would be an unprecedented situation where no one could say for sure what comes next. However, a depreciation of the new currency would be certain and austerity would still be present. On the other hand, it is rather thoughtless to argue that a possible Grexit would leave Europe unaffected. In fact, it would mean a very strong blow at the credibility of the Eurozone.

Setting the precedent that a country can simply leave, I can only imagine what would happen to the required rates for bonds of countries who markets deem to be next in line. We are all concerned about the future of Europe. We all respect our common currency. However, if this edifice is to hold steady, then we need to start discussing policies that unite and not remain wedded to policies that punish.

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