George Gulino, JHU:
Prime Minister Alexis Tsipras of Greece presented a budget to the Greek Parliament on October 8th, which is expected to imminently pass at the time of the writing of this article. In accordance with the austerity demands of sovereign and institutional creditors, the budget will run a 0.5% surplus, which will be used to repay debts. The spending cuts and tax increases meant to achieve this surplus are expected to contribute to the economy shrinking 2.3% in 2015. Furthermore, in 2016 an additional 1.3% contraction in GDP is expected, although the overall contraction in 2016 is expected to include some growth in the second half of the year. Germany and its allies within the European Commission forced Tsipras’ government to capitulate to their demands for extensive austerity and market liberalization measures this summer in exchange for bailout loans to simply keep the government solvent until a longer-term deal can be arranged. These loans and falling tax revenues due to economic contraction will drive Greece’s debt up to 198% of GDP in 2016, a 10% spike from the current level. News outlets and financial analysts have focused with anxious optimism on events like this vote that constitute the week-to-week execution of the bailout agreement. This narrow focus is misguided, as it implies that consensus has been reached on how to solve Europe’s debt problems and that focus has collectively shifted to execution. No such consensus has been reached and, if it had been, it would uphold the status quo that is causing the European Union to slowly unravel.
Even the observer looking for agreement among the key formal players will be disappointed. The International Monetary Fund (IMF), in this situation a proxy for the United States’ view, refuses to accept the terms of the deal made between the European Commission and Greece. The IMF has insisted that partial debt relief be a part of a long-term solution to Greece’s solvency crisis; it has not ruled out further market deregulation either. In the absence of debt relief to accompany pro-business reforms, the IMF is confident that Greece will never successfully pay off its debt. The debt need not be partially forgiven, but temporary repayment grace periods and bond maturity extensions could be negotiated. However, Germany and its allies have insisted that debt relief is a red line not to be crossed. This has effectively blocked an agreement from being reached between Greece and such an important creditor in the IMF.
Germany, Austria, Hungary, Finland, Latvia and other EU Nations have demanded deep austerity measures, although most of the rest of the world has abandoned such policies. The language used to justify austerity goes beyond the financial norms about a debtor’s responsibility. European Union officials and others make the case that the faster Greece repays its debt, the faster its credibility will recover, attracting foreign investment and lowering its borrowing costs. This seems reasonable at face value but can have unforeseen consequences. Excessive doses of spending cuts and tax increases can squeeze commerce at a pace that causes tax revenues to fall despite higher rates of taxation. This is exactly what has occurred in Greece where, despite having run a surplus every year since 2009, government debt has grown as a percent of GDP from 109% to the 198% 2016 figure. An observer naïve enough to assume the European Union has its member states’ best interests at heart would expect EU technocrats to reevaluate their policy. Instead, they are doubling down. Tsipras’ government has had to accept the EU’s demands that Greece effectively tax its two largest industries—shipping and tourism—out of existence. The tonnage tax on shipping vessels will increase by 4% every year until 2020, and the standard port privileges offered by any competitive port-of-trade around the world will be revoked. The nation’s second largest industry and the only major one to grow in 2015, tourism, will then be hit with a ludicrous 23% sales tax.
This does not reflect the behavior expected of the European Union, an institution created to heal Europe’s old wounds and increase cooperation between member states. The world is pretty familiar with the suffering that austerity has caused in Greece, but public opinion in northern Europe shows that people there are less convinced of austerity’s moral and practical failures. Meanwhile, the IMF wants nothing to do with the current austerity measures, and private creditors and the European Commission seem convinced that their own proposals will fail. Capital markets have priced in a Grexit within the next five years, and reasonably so. For all the talk of Greece having to honor to its commitments, the business press has been alight with detailed descriptions of how German Finance Minister Wolfgang Schauble is making behind-the-scenes arrangements for forcing a Grexit within the next five years. In the meantime, Germany has benefitted immensely from the Euro-devaluation caused by all the uncertainty. Its trade surplus has grown to an extraordinary 2015 projection hovering around 8% of GDP, earning it derision for poor global citizenship from the U.S. Treasury, the Brookings Institution, and others. This conflict of interest in such a high-stakes crisis is glaring.
Nevertheless, the unfortunate situation in Greece looks set to continue until Greek voters eventually reject austerity and are again coerced, or until bigger and more vital European countries inevitably face solvency crises of their own. When Europe finds itself needing to bail out Italy within the next ten years or eventually even France, will Germany still be able to impose industry-destroying taxes and “bailouts” where the majority of the loans go straight to repaying the lender? Greece may be a needle in the European haystack in terms of population and GDP, but it is harder to imagine a “European Union” post-“Italexit” or post-“Frexit”. Coupled with the inability to mount a unified response to the refugee crisis, Europe’s simultaneous mishandling of the also-existential debt crisis in the case of Greece is worrisome for the continent’s future as a globally crucial economic and political bloc.