Greece's Debt Must Be Restructured

It is now clear that the problems of the Greek economy
- and the eurozone - have not been and cannot be solved by the large
infusion of emergency finance from the ECB and the IMF. The Greek
government is being asked to implement austerity measures that will
cause a major decline in incomes and employment not just now but in the
foreseeable future, and which will not correct the existing imbalances
but actually worsen them.

The heavily-indebted poor countries (HIPCs)
of Africa could tell the Greeks a thing or two about this process. They
could tell them how the deflationary measures that are imposed on
governments cause economic activity to go into a downward spiral that
destroys existing capacities and prospects for future growth, and
pushes large sections of the population into a fragile and insecure
material existence. They could tell them about how it is fundamentally
unsustainable, because the downslide in GDP makes it ever harder to
service the debt, which in turn keep not only piling up, but even
expanding, because of the unpaid interest that keeps getting added to
the principal and then compounded, so that the country's debt just
keeps rising even with no fresh inflows. They could tell them how
ultimately there will be no alternative to restructuring the debt,
because the problem will only grow in magnitude even with (and partly
because of) the most stringently applied austerity measures. They could
tell them about their own experience of several lost decades of
economic retrogression, which could have been avoided had the debt
restructuring taken place much earlier and a different set of policies
for economic recovery been pursued.

This experience should point
to the obvious lesson: that there is no alternative to a major
restructuring of the Greek debt, involving a loss taken by the
international lenders who did not exercise due diligence in the act of
lending in the first place. If it does not happen now, it will in any
case have to happen at some time in the future, after creating a great
deal of material distress in Greece.

Why is such an obvious
conclusion not even being talked about? A restructuring of the Greek
debt would involve quite a large haircut for the German and French
banks who lent extensively during the boom, and helped to create the
imbalances that have made the Greek economy less competitive than that
of Germany, for example. This cannot be allowed to happen, so the
burden of adjustment is placed entirely on the Greek people, for
several generations, in what will clearly be an unsustainable process.

It gets worse. Other countries that are seen to have potential problems like Greece are already moving towards austerity measures
and contractionary macroeconomic policies that are bound to threaten
the frail economic recovery and engender or intensify the next
recession. Spain has just announced not only tightening of monetary
policies, but fiscal contraction involving cuts in public sector pay
and pensions and much else. This is particularly remarkable, because
until two years ago Spain ran a fiscal surplus (the deficit was because
of the private sector) and its recent deficits are entirely a result of
the crisis.

Ireland is already undergoing the most extreme
deflationary package involving significant decline in GDP and slashing
of public expenditure in all sorts of areas from physical
infrastructure to education. The Baltic countries, not only Latvia,
which has an IMF programme, but Estonia where the pain is
self-inflicted, are experiencing dramatic declines in incomes,
employment and wages because of their severe austerity packages. In
Romania, there was the remarkable spectacle of the police taking to the
streets to protest against their wage decreases. In Britain, the new
government is already talking about measures to cut the deficit by slashing spending and raising indirect taxes.

All these countries are hoping that they can export their way
out of this mess, but that is simply not feasible as the numbers do not
add up. So these countries - and by association, the rest of Europe -
are effectively condemning themselves to a period of stagnation or
declining incomes, with all the economic and social problems that will
generate.

How can such an illogical set of policies be taken so
seriously? The problem is that the power of finance - in politics, in
media and in determining national and international economic policies -
remains undiminished despite its recent excesses and failures. That is
why the restructuring of public debts is not on the agenda; that is why
talk of fiscal balancing so rarely even mentions taxes on capital, and
much less on the same financial sectors that benefited from large
publicly funded bailouts and are now holding to ransom the hands that
have fed them.