Greece: Strophe and Antistrophe

The Greek tragedy contains more than its fair share of irony. Perhaps the biggest irony of all is that in the drafting of the Maastricht Treaty on Economic and Monetary Union in the late 1990s, it was Germany that insisted on the “no bailout” clause. A Greek default in 2010 would have avoided Greece’s fiscal troubles cascading into an existential moment for the European Union (EU). This is something many, including myself, proposed. But Germany and France did not want that. They feared that the damage it would do to the German and French banks that had gorged themselves on high-yielding Greek debt would further endanger a fragile global financial system. More debt was heaped onto already impossible-to-repay levels of debt. Greece’s economic sustainability was sacrificed on the altar of European financial stability.

Greece did deliver a haircut to its creditors, but it was not enough. This is because the economic austerity that came with the first Greek bailout pushed the economy into a free fall. The sum of gross domestic product (GDP) shortfalls over the past seven years, the difference between each year’s real GDP level and the 2007 level, is a staggering 135%. (This measure, which I learnt from Charles Wyplosz, better captures the hole Greece fell into than annual GDP changes.) Greek debt was cut, but GDP fell even further. Greece is the poster child of the anti-austerity cause.