by Joseph E. Stiglitz
When the euro crisis began a
half-decade ago, Keynesian economists predicted that the austerity that was
being imposed on Greece and the other crisis countries would fail. It would
stifle growth and increase unemployment – and even fail to decrease the debt-to-GDP
ratio. Others – in the European Commission, the European Central Bank, and a
few universities – talked of expansionary contractions. But even the
International Monetary Fund argued that contractions, such as cutbacks in
government spending, were just that – contractionary.
We hardly needed another test.
Austerity had failed repeatedly, from its early use under US President Herbert
Hoover, which turned the stock-market crash into the Great Depression, to the
IMF “programs” imposed on East Asia and Latin America in recent decades. And
yet when Greece got into trouble, it was tried again.
Greece largely succeeded in
following the dictate set by the “troika” (the European Commission the ECB, and
the IMF): it converted a primary budget deficit into a primary surplus. But the
contraction in government spending has been predictably devastating: 25%
unemployment, a 22% fall in GDP since 2009, and a 35% increase in the
debt-to-GDP ratio. And now, with the anti-austerity Syriza party’s overwhelming
election victory, Greek voters have declared that they have had enough.
So, what is to be done? First,
let us be clear: Greece could be blamed for its troubles if it were the only
country where the troika’s medicine failed miserably. But Spain had a surplus
and a low debt ratio before the crisis, and it, too, is in depression. What is
needed is not structural reform within Greece and Spain so much as structural
reform of the eurozone’s design and a fundamental rethinking of the policy
frameworks that have resulted in the monetary union’s spectacularly bad
performance.
Greece has also once again
reminded us of how badly the world needs a debt-restructuring framework.
Excessive debt caused not only the 2008 crisis, but also the East Asia crisis
in the 1990s and the Latin American crisis in the 1980s. It continues to cause
untold suffering in the US, where millions of homeowners have lost their homes,
and is now threatening millions more in Poland and elsewhere who took out loans
in Swiss francs.
Given the amount of distress
brought about by excessive debt, one might well ask why individuals and
countries have repeatedly put themselves into this situation. After all, such
debts are contracts – that is, voluntary agreements – so creditors are just as
responsible for them as debtors. In fact, creditors arguably are more
responsible: typically, they are sophisticated financial institutions, whereas
borrowers frequently are far less attuned to market vicissitudes and the risks
associated with different contractual arrangements. Indeed, we know that US
banks actually preyed on their borrowers, taking advantage of their lack of
financial sophistication.
Every (advanced) country has
realized that making capitalism work requires giving individuals a fresh start.
The debtors’ prisons of the nineteenth century were a failure – inhumane and
not exactly helping to ensure repayment. What did help was to provide better
incentives for good lending, by making creditors more responsible for the
consequences of their decisions.
At the international level, we
have not yet created an orderly process for giving countries a fresh start.
Since even before the 2008 crisis, the United Nations, with the support of
almost all of the developing and emerging countries, has been seeking to create
such a framework. But the US has been adamantly opposed; perhaps it wants to
reinstitute debtor prisons for over indebted countries’ officials (if so, space
may be opening up at Guantánamo Bay).
The idea of bringing back
debtors’ prisons may seem far-fetched, but it resonates with current talk of
moral hazard and accountability. There is a fear that if Greece is allowed to
restructure its debt, it will simply get itself into trouble again, as will
others.
This is sheer nonsense. Does
anyone in their right mind think that any country would willingly put itself
through what Greece has gone through, just to get a free ride from its
creditors? If there is a moral hazard, it is on the part of the lenders –
especially in the private sector – who have been bailed out repeatedly. If
Europe has allowed these debts to move from the private sector to the public
sector – a well-established pattern over the past half-century – it is Europe,
not Greece, that should bear the consequences. Indeed, Greece’s current plight,
including the massive run-up in the debt ratio, is largely the fault of the
misguided troika programs foisted on it.
So it is not debt
restructuring, but its absence, that is “immoral.” There is nothing
particularly special about the dilemmas that Greece faces today; many countries
have been in the same position. What makes Greece’s problems more difficult to
address is the structure of the eurozone: monetary union implies that member
states cannot devalue their way out of trouble, yet the modicum of European
solidarity that must accompany this loss of policy flexibility simply is not
there.
Seventy years ago, at the end
of World II, the Allies recognized that Germany must be given a fresh start.
They understood that Hitler’s rise had much to do with the unemployment (not
the inflation) that resulted from imposing more debt on Germany at the end of
World War I. The Allies did not take into account the foolishness with which
the debts had been accumulated or talk about the costs that Germany had imposed
on others. Instead, they not only forgave the debts; they actually provided
aid, and the Allied troops stationed in Germany provided a further fiscal
stimulus.
When companies go bankrupt, a
debt-equity swap is a fair and efficient solution. The analogous approach for
Greece is to convert its current bonds into GDP-linked bonds. If Greece does
well, its creditors will receive more of their money; if it does not, they will
get less. Both sides would then have a powerful incentive to pursue pro-growth
policies.
Seldom do democratic elections
give as clear a message as that in Greece. If Europe says no to Greek voters’
demand for a change of course, it is saying that democracy is of no importance,
at least when it comes to economics. Why not just shut down democracy, as
Newfoundland effectively did when it entered into receivership before World War
II?
One hopes that those who
understand the economics of debt and austerity, and who believe in democracy
and humane values, will prevail. Whether they will remains to be seen.
Joseph E. Stiglitz is
University Professor at Columbia University. His most recent book is The
Price of Inequality: How Today's Divided Society Endangers Our Future. Among
his many other books, he is the author of Globalization
and Its Discontents, Free
Fall: America, Free Markets, and the Sinking of the World Economy, and
(with co-author Linda Bilmes) The
Three Trillion Dollar War: The True Costs of the Iraq Conflict. He received
the Nobel Prize in Economics in 2001 for research on the economics of
information.
