Greece has been dragged through a lot of mud in the media over the past few years because previous governments overborrowed, and that contributed to the initial crisis that – we should remember – Spain, Portugal, Italy and almost everyone else in the eurozone had to go through. But the initial crisis could have been resolved relatively quickly. In the United States, which was hit by the explosion of an $8 trillion housing bubble, our recession lasted just 18 months. In Greece it has been six years, with a loss of a quarter of its national income, and more than 25 percent unemployment (and twice that for youth).
By now it is clear not only to the majority of economists, but to most people who are paying attention that this long depression was not only unnecessary but caused directly by bad policies. The Greek government implemented budget tightening that shrank the economy and worsened the debt burden – which has gone from 115 percent of GDP before the Greeks signed their first agreement with the IMF in 2010, to more than 170 percent today. At the same time, the European Central Bank (ECB), which could have helped Greece by keeping its borrowing costs down, allowed Greece’s interest rates to soar, provoking a prolonged crisis not only for Greece but for the eurozone. As a result, the unemployment rate in the 19-country eurozone is still twice that of the United States today.
All of this was due more to political than to economic motives. It was not financial markets or even the big banks that drove this disaster, but European officials who prolonged the financial crisis in 2011 and 2012 and used it to try to remake the economies of Greece, Spain, Portugal, Ireland, and Italy more to their liking. After more than 20 governments in the eurozone had fallen, the Greek people elected a government – led by the Syriza party — that was committed to saying no to further austerity, economic damage, and mass unemployment.
European officials, led by extremists in the German government, offered “my way or the highway” to the new government of Greece after it was elected on January 25. On February 4, the ECB cut off the most important line of financing to the Greek banking system, provoking a stock market crash and more people taking their bank deposits out of the country. On February 12, European officials were indicating that Greece could lose access to Emergency Liquidity Assistance from the ECB, which would provoke a severe financial crisis and possibly collapse the Greek banking system. But Syriza did not cave. A week later, fearing an impasse that could force Greece out of the eurozone, European officials blinked and agreed to renegotiate the terms of the so-called “bailout” that previous Greek governments had agreed to, over the next four months.
There will be tense negotiations ahead, but one thing is clear: Greece is fighting for the future of Europe. Citizens of the eurozone countries didn’t know when they formed the monetary union that they were not only losing their sovereign and democratic rights to control their most important macroeconomic policies – monetary, exchange rate, and then fiscal (spending and taxing) — for the most vulnerable countries in recession, when they needed it most. They had also ceded this power to people with an anti-social-Europe agenda, people who wanted to shrink the government, and cut health care, pensions and wages.
Now Greece is trying to get some of that democracy back. It is badly needed if Europe is to escape from this long nightmare.
This column originally ran in the Fresno Bee.