Greek debt

The Greek people have voted against more austerity. Who wouldn’t, given the choice? Politically, it is a strong move by Syriza: economically, well, we shall have to see. Germany is now faced with having to find a face saving formula to help Greece with fewer punitive (or reforming, depending on your point of view) measures – or have Greece leave the monetary union and possibly the EU.

No doubt it is better to be a creditor than a debtor. But there is some symbiosis in every case. As the old adage has it, if you owe and cannot pay the bank £100 you are in trouble. If you owe and cannot pay the bank £100 million the bank is in trouble. On an intergovernmental level the relationship is even more symbiotic than between customer and bank.

Country A has a surplus to lend only because country B has bought country A’s exports on credit, even if the relationship is confused by the parts played by many other countries. So it is not quite right for country A to claim the moral high ground, as Germany is now doing with Greece. Solidarity cuts both ways but the point about sovereign loans is that you cannot send the bailiffs round.

On the other hand, if the repayment of loans is seen as optional, the whole process of international trade could grind to a halt because nobody wants to take the risk. Those with something to sell would insist on cash and just keep the money under the national mattress rather than lending it out. Actually it’s worse: what would “cash” even mean in this context? There would have to be a complicated system of barter, which is perhaps what happened in earlier and considerably poorer times.

So what will now happen? Haven’t got a clue! Germany must choose between two cherished aims, leadership of a United Europe and the maintenance of fiscal propriety. If Greece were the only major debtor my guess is solidarity would disappear and they would decide a United Europe without Greece was better than a loss of power. They would cut Greece loose to take the dire consequences of defiance and incidentally show other countries who runs things. But the calculation has to take into account what happens to the other Southern European debtor countries, who will come under immediate pressure from markets. Merely saying that the ECB supports them will not be nearly enough if Greece has gone. So a face saving formula involving a rescheduling of Greek debts with tough words but easier conditions is more likely. Interesting times.

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