Instead of genuine savings, Greece has benefited above all from the concessions of other eurozone countries. But this type of austerity has not really helped the country or its creditors. As history shows, debt socialization only leads to hatred and conflict.
Austerity works differently: part of the loans from EU countries to Greece consisted de facto of gifts.
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This article was published on September 13, 2024 in the NZZ publishing supplement “Save, save, save” – content realized by NZZ Content Creation in cooperation with the Institute for Swiss Economic Policy (IWP) at the University of Lucerne and the Walter Eucken Institute (WEI) at the Albert Ludwig University in Freiburg im Breisgau.
Austerity generally means strictness. In economic terms, however, the term simply means debt discipline. From the perspective of Keynesian theory, such discipline is bad because it prevents hot flashes in the pan in times of excess production capacity. Politicians are happy to adopt this view because it allows them to shift burdens onto future voters who do not have to fear them today.
There is probably no other country whose policies have been associated with the term austerity policy as often as Greece over the past decade and a half. For years, left-wing economists in Europe and overseas, particularly those associated with the International Monetary Fund (IMF), have said that the international community is choking off the Greek economy by not granting Greece the loans it needs to get back on its feet. Germany, represented by its finance minister Wolfgang Schäuble, was at the forefront of those who urged Greece to exercise discipline. There were numerous demonstrations in Athens at which Schäuble and his chancellor Merkel were associated with Nazi emblems. And if those criticized did not open their wallets quickly enough, the Greek government would show them its drawer with the reparations demands against Germany. That worked.
Generous relief efforts
In fact, the austerity that Greece’s politicians felt so painfully did not originate from the policies of other countries, but was entirely the result of the growing scepticism of private creditors who had long since lost all confidence in the country’s creditworthiness and were simply no longer prepared to finance further spending with new debt. The international community has by no means practiced austerity towards Greece. On the contrary, it has alleviated the austerity of the markets through generous aid measures to an extent that has hardly ever been seen in history. The aid just did not go as far as Greece would have liked.
But the Maastricht Treaty demands debt discipline. Article 125 TFEU rules out fiscal bailouts of other countries, and Article 123 TFEU rules out government financing with the printing press. In his speech to the Bundestag on the final determination of the participants in the euro zone, Chancellor Kohl said twice in a row to give his statement gravitas and credibility: “According to the contractual provisions, there is no liability of the Community for the liabilities of the member states and no additional financial transfers.” The promise of absolute debt discipline is the central condition that Germany demanded at the time for giving up the D-Mark.
Despite this, Greece received a lot of money from the international community and the central banking system after it had cheated its way into joining the euro with the help of some truly adventurous tricks from its statistics office. Public lending began in 2010 with the first rescue package worth 73 billion euros. The second package followed from 2012 to 2013 with a volume of 142 billion euros, and the third package, which lasted from 2015 to 2018, provided another 62 billion euros. In total, public loans from the international community amounted to 278 billion euros, which, in relation to GDP, which was in the region of 200 billion euros during the crisis years, was an order of magnitude beyond any historical parallels. The loans also included 32 billion euros in IMF loans.
Some of the loans were de facto gifts. On the one hand, Greece benefited from extremely low interest rates, far below the market level. On the other hand, the international community subsequently granted Greece maturity extensions and interest moratoriums, which, as the ifo Institute calculated, amounted to cash gifts amounting to 77 billion euros. There could therefore be no talk of an austerity policy by the international community, quite the opposite.
The bailouts were backed by private banks that had granted Greece loans up to that point and wanted to get out of the country during the crisis. The French banks in particular were hoping for this because they had built up the largest loan claims against Greek creditors, twice as many as Germany in relation to gross domestic product (GDP). This was the reason why, according to her Spanish colleague Zapatero, President Sarkozy had threatened German Chancellor Merkel with the end of the monetary union if she continued her initial resistance to the bailouts.
Inflation puts pressure on debt burden
A large part of the public loans were of course used not only to service the debts of private creditors, but also to further finance the Greek state budget. Despite the financial relief, the Greek government debt ratio rose from 148 to 207 percent of GDP between the first bailouts in 2010 and 2020, the year the Corona crisis broke out. And if there had not been a debt haircut of 105 billion euros at the expense of private creditors in 2012, the ratio would have risen mathematically to 263 percent of GDP due to the rampant new debt.
In the meantime, by the end of 2023, the Greek debt ratio has fallen again to 162 percent. But this has little to do with a new austerity in the country, as one might initially assume. It is mainly due to inflation, which has inflated the Greek nominal gross domestic product in the denominator of the fraction that defines the debt ratio. From the end of 2020 to the end of 2023, the price index of Greek GDP rose by 15 percent, which in itself already reduced this ratio by 28 percentage points.
In addition to the Fisci of Europe, the European Central Bank also participated in the bailout of Greece. On the one hand, it allowed the Greek central bank to create digital central bank money far beyond the liquidity supply required by Greece itself, which it made available to banks as loans or in exchange for securities. Companies, citizens and the state were thus able to make net transfers to settle foreign bills, especially for imports, to repay debts to private foreign creditors and for private asset acquisition abroad; the advertisements by Greek real estate companies for the purchase of real estate in Germany are legendary. The Greek central bank had no account balances with the Euro system for these transfer orders and did not have to hand over any marketable assets, but was instead able to use an unlimited overdraft facility with the Euro system, which was booked in the so-called Target system. The total amount of Target loans had recently (June 2024) reached a volume of 114 billion euros. Even if these loans are adjusted for the so-called cash balance, as is sometimes suggested, the Euro system’s credit volume in favour of Greece remains at the latest at EUR 88 billion. This loan is paid interest according to the complicated rules of interest pooling in the Euro system, which even brought Greece profits during times of negative policy interest rates in the Euro system.
On the other hand, the ECB headquarters in Frankfurt itself bought Greek government bonds for 11 billion euros. This relieved the Greek central bank because the purchases immediately induced Target-reducing transfers to Greece.
Did this huge aid benefit Greece? On the surface, yes, because if a country is able to export bonds on a long-term basis and use the proceeds to buy the imported goods needed to maintain its standard of living, it can save itself the trouble of producing the goods. A small and strategically important country like Greece can perhaps even assume that this strategy can be used again and again without having to fear ever having to pay off its debts.
However, this strategy cannot be replicated as a general rule that could also work for larger Eurozone countries such as Italy, because it would overwhelm the capacity of the other Eurozone countries. “Too big to bail” is certainly the right motto here.
Apart from that, it is not even clear what benefit Greece itself has had from the bailout. The export of bonds weakens its own economic strength, a phenomenon that can also be observed in countries that export natural resources that they do not produce but only extract. It was observed in Holland in the 1960s, when the economy weakened under the influence of natural gas discoveries (which is why economists call the phenomenon the “Dutch disease”), and it is still very clearly seen in other resource-exporting countries such as Venezuela. Greece, too, as the attached graph shows, is still far from being able to return to the economic strength it had before the start of the financial crisis in 2008.
The question is therefore whether it would not have been better for Greece, in 2010, when its bankruptcy was imminent, to have burdened the creditor countries itself with an open state bankruptcy rather than the international community and to have left the euro in order to devalue and thus very quickly restore its own competitiveness.
For the euro system itself, such a waiver of a bailout would certainly have been advantageous. It would not only have prevented the breach of the Maastricht Treaty. Rather, the creditors’ liability for the damage caused by reckless lending would have strengthened the long-term stability of the euro system. This stability arises because creditors, fearing the loss of their money, react to increasing borrowing by debtors by increasing the risk premiums they demand, which in turn causes debtors to be more cautious about taking on further debt.
Dangerous bailouts
The history of the USA shows very clearly what can happen if you artificially reduce risk premiums through bailouts. After the founding of the USA, there were various measures to socialize the debts of individual states at the expense of the international community. The result was a completely unchecked orgy of debt, because the creditors assumed that the new central state would always be responsible for the debts of the individual states if necessary and could not go bankrupt itself.
The debt orgy led to a Keynesian, demand-driven economic boom that became a bubble. The bubble burst in 1835 and drove nine of the then 29 states and territories into formal bankruptcy in the seven years up to 1842, because even the central government would have been unable to take on the debt. Nothing but hatred and strife arose from the socialization of debt, and there are even historians who see a connection with the Civil War that broke out just 19 years later. Europe would have done well not to even attempt to repeat history, as it did after the unspeakable austerity debate during the euro crisis.
Hans-Werner Sinn, Professor Emeritus of Finance, was President of the ifo Institute for Economic Research in Munich.
