As long ago as 2010, when Greece was first bailed out, many knowledgeable observers, including some members of the I.M.F.’s board of directors, worried that Greece would never be able to pay back all of its debts—its total debt burden is about a hundred and seventy five per cent of the country’s G.D.P.—and advocated imposing a haircut on its creditors. Rather than doing this, the European Union, the European Central Bank, and the I.M.F. loaned the Greek government money to pay its creditors, which were mostly European banks, at a hundred cents on the dollar. In the now-famous words of Karl Otto Pöhl, a former head of the Bundesbank, the bailout “was about protecting German banks, but especially the French banks, from debt write-offs.”
.. But they were concerned that writing off some of Greece’s debts would set a precedent for other heavily indebted countries, such as Ireland, Italy, and Portugal. Rather than going down that route, they stuck to the fiction that Greece, if it embraced austerity and structural reform, would eventually be able to pay down all of its loans—a strategy widely known as “extend and pretend.”
.. Greece isn’t going to cut, or reform, or grow it’s way to debt sustainability. Either it will default on virtually all of its loans and adopt a new currency, or it will need debt forgiveness of the sort that Germany enjoyed after the Second World War, when more than half of its loans
Greece’s Sorry Reckoning
Both sides played a game of chicken, and neither was bluffing — the Europeans, led by Germany, were determined to continue imposing austerity; the Greeks were determined to ride their recklessness to the end. The Greeks’ demand for debt relief, and their declarations of restored pride, were seen by creditors as petulance. Instead of working for solutions, both sides sought excuses for failure.
Europe’s Many Economic Disasters
But there are many European officials and politicians who are opposed to anything and everything that might make the euro workable, who still believe that all would be well if everyone exhibited sufficient discipline. And that’s why there is even more at stake in Sunday’s Greek referendum than most observers realize.
One of the great risks if the Greek public votes yes — that is, votes to accept the demands of the creditors, and hence repudiates the Greek government’s position and probably brings the government down — is that it will empower and encourage the architects of European failure. The creditors will have demonstrated their strength, their ability to humiliate anyone who challenges demands for austerity without end. And they will continue to claim that imposing mass unemployment is the only responsible course of action.
Or to put it a bit differently, it’s reasonable to fear the consequences of a “no” vote, because nobody knows what would come next. But you should be even more afraid of the consequences of a “yes,” because in that case we do know what comes next — more austerity, more disasters and eventually a crisis much worse than anything we’ve seen so far.
What Would Thucydides Say About the Crisis in Greece?
The war between Athens and Sparta was already nearly two decades old, yet no end was in sight. With its citizens weary and restless, Athens adopted a brutal political calculus, declaring that those city-states not with them were, quite simply, against them. They threatened a neutral Melos with physical destruction if it refused to join the Delian League.
.. When Europe’s leaders insist that Greece belongs to the European “homeland” whether it likes it or not, ignore the growing social unrest and political paralysis in Greece, and refuse to reconsider the austerity package they previously negotiated with Athens’s former governing coalition, we are not that far from the Athenian claim at Melos that “the strong do what they have the power to do and the weak accept what they have to accept.”