The Greek Crisis: One Question, Four Answers

The debt crisis in Greece has any number of solutions. One has the rich of Greece all agog with fond expectations.

By Salvatore Babones

The big debate in Europe today is over whether or not the Greek government will default on its debts — and if so, when. Everyone on all sides agrees that the Greek government cannot afford to pay its current debts based on its current revenues and obligations. But a government, unlike a company, can’t just go out of business. In order for the Greek government to continue to function, someone is going to have to pay up. The only question is: who?

There are several possible answers to that question.

First, the Greek government could simply stop making payments on its debts. Greece is a sovereign state; no one can make it pay its debts. Many other countries throughout history have defaulted on their debts. Of course, a default isn’t free. Someone would lose a lot of money: namely, the European banks that have lent to the Greek government. That’s why Germany and the Netherlands are so adamant that a Greek default is not an option. It’s their banks that are owed money by the Greek government.[pullquote]Rich Greeks have been pushing a euro exit ever since the May 6 elections turned the two historical ruling parties out of office.[/pullquote]

Second, Greece could leave the euro and convert all its government debt into a new currency. Greece has used the euro as its official currency since the introduction of the pan-European currency in 2002. The Greek government could theoretically re-introduce a new national currency convert all its debts into the new currency, then print money to pay the debts. This option — a “euro exit” — has dominated headlines in recent weeks.

Most European governments oppose a Greek exit from the euro because the effect on European banks would be the same as a default: it would convert their euro loans to Greece into loans in a worthless new currency. On the other hand, rich Greeks would benefit enormously from a euro exit. Their savings are safe in Swiss and German bank accounts, but their debts in Greece (mortgages, business loans, credit card balances, etc.) would be converted into the cheap new currency.

Rich Greeks have been pushing a euro exit ever since the May 6 elections turned the two historical ruling parties out of office. Rich Greeks are deathly afraid of the third option for answering the Greek debt question. Greece could impose high taxes on the wealthy to help pay the country’s euro debts.

The third answer, high taxes for the wealthy and stringent enforcement of existing taxes, is a nightmare scenario for Greece’s rich and powerful ruling class. Imagine if everyone had to live on ten or twenty thousand euros a year ($12,500 – $25,000 a year). Poor Greeks would have no problem. They’re already living on that. For rich Greeks though, that would be a catastrophe. Everyone admires the ancient Spartans, but no one wants to be one. The Athenians were much more fun.

To break the deadlock, the Greek parliament has called for new elections to be held in June. If socialist parties win these elections, they plan to raise taxes on the rich to pay for government services. After socialist election victories this month in France and the German state of North Rhine – Westphalia, a Greek victory for socialist parties is certainly possible. Wealthy Greeks are scared — and according to news reports are hiding their cash out of the country as fast as they can.[pullquote]Europe’s rich have hardly been asked to make any sacrifices at all.[/pullquote]

There is, however, one more answer to the question of who will pay for the Greek government’s inability to pay its debts.

The fourth answer is what Europeans now call “austerity.” Austerity in Europe today has strayed far from its original meaning of shared sacrifice. Instead, austerity has come to mean cutbacks in government services for the poor and working class, reductions in retirement benefits, and lower living standards for ordinary workers and their families. Europe’s rich have hardly been asked to make any sacrifices at all. If anything, the rich are benefiting from austerity as wages for others go down.

The right answer is Answer 3. Governments should pay their debts, and there’s no reason at this point for Greece to leave the euro currency bloc. The euro has brought price stability and international integration to the Greek economy. There are good reasons for countries not to join in single international currency, but after ten years in the bloc it would impose an unreasonable burden on small businesses and ordinary savers were Greece to leave it.

On the other hand, the likely answer is Answer 4. At least, that’s the answer that the European Union, the European Central Bank, big business lobbyists, bondholders, and that amorphous but strangely influential entity called “the market” are pushing for. Europe’s elites — including Greece’s elites — are hell-bent on squeezing ordinary citizens to pay for the consequences of the global financial crisis, and they don’t have to live in Greece to deal with the consequences. God help the Greeks if they succeed.

Salvatore Babones is a senior lecturer in sociology and social policy at the University of Sydney and an associate fellow at the Institute for Policy Studies.