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The troika saved banks and creditors – not Greece


Alexis Tsipras’ decision to put the write-off of a large part of the nominal value of Greece’s public debt and a moratorium on the repayment of the remaining part of the debt at the centre of his electoral program has sparked a lively debate on whether Greece ‘deserves’ debt relief or not. This is a mistake. As Paul Krugman has often pointed out, ‘economics is not a morality play… in which virtue is rewarded and vice punished’.

The issue is not – and should never be – whether a country deserves to see its debt forgiven or not, but only whether it needs it or not, as Jeffrey Sachs recently wrote in The Guardian. And as far as Greece is concerned ‘the answer is unequivocal’, says Sachs. ‘Anybody who does the Greek debt arithmetic (and it sometimes seems that in Berlin nobody actually does) knows that it cannot repay its external debts, now around 170% of GDP, without a level of pain that is simply beyond the tolerance of democratic societies’.

There is an almost unanimous consensus among economists regarding this point (with rare exceptions, such as Andrew Watt and Lorenzo Bini Smaghi, whose attempts to prove that Greece’s debt is in fact sustainable are unconvincing in my opinion); see for example Paul De Grauwe, Simon Wren-Lewis, Thomas Piketty, Philippe Legrain, Dani Rodrik and Wolfgang Münchau, just to name a few.


In other words, there is little doubt that from a purely economic standpoint Greece needs debt relief. But unfortunately economics is never just about economics: whether we like it or not, morality and culture shapes people’s attitudes to economic issues, and nowhere is this clearer than with the issue of debt (private or public). It would be fair to say that the common man’s prevailing stand on the issue is that debts incurred have to be repaid, whatever the cost.

This is especially true for Germany, where the word for ‘debt’ – ‘schuld’ – famously also means ‘guilt’. The fact that Germany is the hegemonic power in Europe has meant that its leaders’ deeply moral interpretation of the euro crisis – which pitted the profligate, debt-ridden wrongdoers of the periphery against the virtuous, responsible countries of the core – rapidly became conventional wisdom among European politicians, commentators and bureaucrats.

Politically, this proved very effective for Germany (and the European elites in general), as it provided a powerful ideological and perhaps more importantly moral justification for the brutal austerity policies prescribed to the countries of the periphery (and especially Greece) in recent years.

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