Greece to the Eurozone’s Rescue: Why the Troika Should Forgive Greece’s Debt

Lambert here: But does the light bulb want to be changed?

By Ashoka Mody, Charles and Marie Robertson Visiting Professor in International Economic Policy at the Woodrow Wilson School, Princeton University. Originally published at Breugel.

The European Commissioner for Economic and Financial Affairs, Pierre Moscovici’s unnecessary—and unseemly—visit to Athens served to spotlight Europe’s corrosive politics. Mr. Moscovici chose to all but endorse Antonio Samaras, the beleaguered Greek Prime Minister, who promises to play by the European Union’s dysfunctional rules. And the Commissioner described as “suicidal” the positions held by the opposition party Syrzia, which may well lead the next government and correctly deems the EU’s rules to be intolerant.

His boss, European Commission President Jean-Claude Juncker, weighed in by expressing his preference for Greece to be led by “known” faces.

Greece should not have been a member of the eurozone. But after the German Chancellor Helmut Kohl ensured Italy’s inclusion in May 1998, Spain and Portugal were waived in. So, the inevitable Greek entry came in 2002. By then, any vestige of economic good sense in the euro’s construction had been abandoned in the name of peace and friendship, a cause that Moscovici and Juncker presumably seek to promote.

From October 2009, when Greek authorities acknowledged that they had lied about their fiscal accounts, to May 2010, the claim was that the problem would go away without external help. When eventually the troika—the European Commission, the European Central Bank, and the International Monetary Fund—put together a large bailout fund, the manifestly untenable claim was that Greece would repay its private creditors in full. In July 2011, the repayment terms on the troika’s debt were eased, but it was too little too late. Large losses were eventually imposed on private Greek creditors but not before harsh austerity caused an extraordinary slump in growth and lasting misery.

Pretty much every time there was a choice between the right and wrong decision, the wrong one was taken.

Today, the only right way forward is for the troika to allow Greece to repay its official creditors in, say, 100 years. This will effectively mean debt forgiveness but the cosmetics may help German leaders tell their citizens that they will be repaid.

But, of course, the system fights back all rational thinking. Ireland and Portugal will yelp that they also deserve more relief on their troika borrowings. More fundamentally, the forgiveness will directly contravene the Lisbon Treaty’s no-bailout provision, which prevents one member state from paying another’s debts. That would call into question the constitutionality of the European Stability Mechanism, which was approved by the European Court of Justice on the basis that the loans from the facility would be repaid with an “appropriate margin.”

At some point, a new fork in the road has to be taken. Today, Greece offers an opportunity to modestly test the eurozone’s pressure points. The stakes are high not just for the resolution of the crisis but for the future shape of Europe. Through this crisis, Greece has been at the leading edge of testing the eurozone’s most idealistic goal: greater political unity. Moscovici’s visit to Athens accentuates just how far that goal has been setback.

It is easy to label the forces that wish to loosen European tethers as reactionary. But that does not help. These same debates are being played out in Spain and will inevitably appear in Italy, which is being sucked into a debt-deflationary cycle. The discordant politics will make the resolution of economic challenges ever harder, and the politics will grow every more discordant.

With Greece, the mistakes were legion. But a fresh start is now possible. Forgive the troika’s Greek debt. With a primary surplus—fiscal revenues above expenditures—and with now a very low public debt burden, Greece can start afresh with private creditors. The task of monitoring Greek fiscal accounts must shift from Mr. Moscovici’s office in Brussels—and from German officials—to private creditors.

Private creditors who will own newly-issued Greek debt will also unambiguously bear the burden of future defaults, ideally automatically and incrementally through sovereign “cocos,” (contracts that specify debt restructuring at pre-agreed levels of distress). A one-time violation of the no-bailout provision would be accompanied by a credible new no-bailout regime. And Greece will remain under pressure to reform and manage its public finances, but under a less politically-charged regime.

The euro’s credibility can be rebuilt only step-by-step. The time for grand gestures, such as quantitative easing by the ECB, has come and gone: little economic benefit will accrue.

Instead, Greece—which has been a source of endless disruption—can, for once, be the edge that leads onwards to a more fundamental change in the eurozone’s architecture. Loosening European ties and allowing countries some real flexibility in managing their national affairs may, in fact, be the only way of stopping the march of the most egregious forms of European nationalism. It may be the only way to give Greece a real chance—and it may be the only way to save the euro.

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. bkrasting

    Yes, by all means, let their be debt relief for Greece.

    But let’s also agree – there is no path for debt relief if Greece stays with the Euro. The price of debt relief has to be GREXIT.

    GREXIT brings with it chaos. Spain and Italy will not be far behind. We’ve seen this movie before in 2011. There are no simple solutions to Greece’s problems. To solve one problem means two more pop up. I guess the folks in Princeton didn’t think this one through.

  2. Rodger Malcolm Mitchell

    Greece, and all euro nations, are monetarily non-sovereign. To survive long-term, a monetarily non-sovereign entity must have net money coming in from outside its borders. (See:

    You and I are monetarily non-sovereign, so we must have income equal to or exceeding our expenditures. All euro nations must have net exports or receive continual infusions of money from the EU.

    There is no alternative.

  3. Chauncey Gardiner

    Article is quite inwardly focused. Would Gazprom’s proposed second Blue Stream natural gas pipeline through Turkey and Greece and on into the heart of the EU not enable Greece to charge transit fees? Those fees could be earmarked for debt repayment if that is to be the only solution acceptable to the Germans.


    Greece also seems to me to be a pivotal nation in terms of an EU interface with the emerging regional economic powers in central and southern Asia. The broader geopolitical situation is in flux. It appears to me that those who stubbornly adhere to the status quo run a not insignificant risk of being marginalized.

    Just a thought.

    1. different clue

      Didn’t I recently read that Gazprom insisted on owning its own pipelines all the way into Europe to prevent Europe from charging all kinds of transit fees and tolls and etc. on Gazprom gas into Europe? Wasn’t Europe’s refusal to agree to Gazprom owning its own Europipelines moving its own gas into Europe and keeping the profit itself rather than having Europe take it all with stacked layers of fees the reason Gazprom/Russia eventually cancelled various pipeline projects into Europe?

  4. Phil

    “With a primary surplus—fiscal revenues above expenditures—and with now a very low public debt burden, Greece can start afresh with private creditors.”

    Except that there is no desire on behalf of Syriza to continue to run government surpluses. They are getting elected to deal with the economic mess created by austerity, not just to write off the debt. The focus on the financial side by economists and commentators is asinine in the extreme.

    1. susan the other

      Very good point. And not discussed by anyone. Above: “The task of (paying off debt) must shift from debt paid to the troika (zombies aka gov debt) to the debt paid to private creditors (aka private creditors).” So what becomes of the debt owed to scumbags like vultures like Argentina Fisher? Is this piece saying we should all cool it, face reality, acknowledge debt cannot be repaid and therefore “restructure” debt into 100 year obligations? Well then, just say it please. Please. Everybody already knows it. Debt is a farce.

  5. Ignim Brites

    Can someone explain the actions that monetarily sovereign nations, Russia and Venezuela, might have taken to avoid their present predicaments?

    1. nothing but the truth

      they should link their currency to gold and set the redeeming spread wide enough to prevent speculative redemption.

      this will piss off the IMF but all these are looking to asset strip Russia anyways.

      Gold is not necessary, but some tangible resource backing tothe money is a must. Otherwise you become a puppet of the powers that produce and distribute the imaginary money.

      1. not_me

        The taxation authority and power of government backs fiat and that includes ridiculously expensive and fascist (inexpensive fiat is the ONLY ethical money form for government debts) fiat redeemable in gold and that authority and power is NOT imaginary.

        Gold gets much of its value because of the obsolete expectation and fascist hope that IT will once again be backed by the taxation authority and power of government. To Hell with that!

    2. Ben Johannson

      1) Maintaining free-floating, non-convertible currencies, wirh all public liabilities denominated in those currencies, and denominating their oil sales in their currencies.

      2) Telling domestic banks they’re on their own if they want to go playing around with debt in foreign currencies.

      3) Increasing domestic taxation to reduce currency in circulation as an anti-inflation measure.

      Unfortunately Venezuela and Russia aren’t monetarily sovereign: Venezuela pegs theirs to the dollar and Russia allows Russians to convert their roubles to dollars via the central bank. This creates liabilities neither government has control over.

  6. different clue

    The European powers in authority will not follow a single bit of advice in this article.

    So why doesn’t Greece just simply give up, de-Euroize, re-Drachmafy and leave the Euro?
    And leave it ugly and toss a match on it on their way out the door?

    1. Ronbert

      “So why doesn’t Greece just simply give up, de-Euroize, re-Drachmafy and leave the Euro?
      And leave it ugly and toss a match on it on their way out the door?”

      Because Greece doesn’t want to give up its sugar daddy.

      1. different clue

        But who in Greece is it that gets the sugar from the sugar daddy? It isn’t the majority of non-rich Greek people. They get depression, degradation and despair. So why do they not create, elevate and empower a political power based on Leave The Euro? ” Leave it, leave it ugly and burn it down on our way out the door”?

        I will again offer a theory I once offered a few years ago. Acceding to the Euro as their currency meant to the Greeks that they really were part of White Western Europe. To leave the Euro would be to suspect that they were never more than the NonWhite Gypsy Nation which they have long feared themselves to be thought-of-as by Europe. Or the “rest” of Europe as the Greeks would have it. That in my opinion is what psychologically inhibits the sugarless sugarfree sugar-deprived Greek Majority from leaving the Euro. I hope they can get over their desperate need for “European respect”. Then they could really make some modern history.

  7. Benedict@Large

    A brilliant talk (about 31 minutes) by former German government macroeconomist Heiner Flassbeck in which he pummels the German government’s mercantilist policies for destroying the Euro. Flassbeck gives Germany about a year to make necessary reforms before Europe slides into the hands of the fascist right, but is not optimistic about the chances.

    One way to look at this has the Euro project (and probably most of the rest of the greater Neoliberal project; that of recolonizing the globe with finance as its governing body) is in a three-way dynamic tension right now. The sides are the hard right finance, the hard right proletariat, and the leftists. The leftists are advising the other two how to resolve their differences with little chance of making an impact, while the other two take on a war footing for eventual control. It does not end well.

    1. Chauncey Gardiner

      Thanks for this very informative link, Benedict. It will be interesting to see if the Southern European countries form a coalition and present Berlin with the ultimatum he describes toward the conclusion of his talk. Given the policy rigidity we have seen to date, I question whether the Germans would modify their wage and austerity policies in any event.

  8. js

    I don’t see how Europe could go fascist. The West’s left-wing progressive engine was mauled last century, but the whole Euro project rests on open borders to bust unions, etc. It will more likely be a ‘sell-out’ fascism, where the only thing positive that might have resulted, immigration controls, will be discarded, and more administered austerity.

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