Syriza’s victory was received as a victory for Europe’s generous and compassionate South, versus the stingy and vengeful North. We have no way of knowing if the South would have behaved better than the North if it had found itself in the role of creditor, nor are we entirely certain that the “slap in the face for Merkel” from any news headline will help Prime Minister Tsipras in his dealings with the Community authorities; but it is a good opportunity to dispel some of the misunderstandings about austerity policies and the nature of the debt looming over Greece and, albeit to a lesser degree, other countries as well:
- In 2009, just before the crisis hit, Greek’s public debt amounted to 137.9% of GDP, clearly an astronomical figure for an economy of its stature.
- The deficit-reduction conditions for continued funding — the unfortunate austerity policies — aggravated the problem, not for what they were but for when they were implemented, because if the goal had truly been to help Greece the measures would have been orchestrated quite differently.
- Consequently, the debt is now equivalent to 180% of GDP, after a multi-year period in which GDP has fallen by 25% and unemployment has reached 27.5%. Things cannot go on like this, and the recovery that the outgoing Prime Minister seemed to perceive is nowhere in sight.
The new Prime Minister will ask European authorities to restructure the debt, and for good reason: there is no way the debt can be repaid within the established time frame, which was already rather generous. The authorities will want to reach an agreement to avoid an impasse that could shake up the markets.
However, in my opinion, the negotiation should be based on mutual interest and not legitimacy or justice: We must not forget that the Greek public debt was freely entered into. As such, it is surprising that, simply because the debt is so huge, many consider it unfair or illegitimate and view not repaying it as something perfectly natural. But I must confess that I sympathize with the Greeks, and knowing that a German or Dane would never agree with me on this, I stop to ask myself why. It doesn’t take me long to answer that question: I think a citizen of the North would feel personally responsible for any pledge made by their government, since they feel it represents them. For us, however, the government seems to play a dual role: a tyrant when it is in control, and a scapegoat when it goes off course. Whereas in the North any action to be taken is debated, here we watch the government from the sidelines, criticizing it from a distance, and its action or lack thereof is its own doing.
In particular, our attitude toward the issue of debt is either pure demagoguery or a result of our bad habits: first, we were not raised to believe we were fully responsible for our actions; second, our democracies still don’t work like they should, and we do not identify with our representatives. In the case of Greece, the dissonance between the government and its citizens has reached extreme levels , because the public debt has in no way benefited many of those now suffering the painful consequences of the austerity measures.
Bottom line, this does not justify the citizens of the North demanding repayment down to the last penny of their loans, despite the legal validity: they must remember that we want to be their partners. In this crisis, there are lessons for all parties.
Edition of the article published in La Vanguardia on February 3, 2015
Alfredo Pastor, PhD in Economics from the Massachusetts Institute of Technology (1973), is a professor in the Department of Economics and the holder of IESE’s Banco Sabadell Chair of Emerging Markets.
He was Spain’s Secretary of State for Economics (1993-1995), and a Country Economist at the World Bank (1980-1981), among other positions. He was the Dean of China Europe Business School (CEIBS) from 2001 to 2004. In his career, Alfredo Pastor received the Grand Cross of the Order of Civil Merit in 2004 for his work at CEIBS, and the Godó Award in Journalism in 2011.