September 6th, 2018
(written by lawrence krubner, however indented passages are often quotes). You can contact lawrence at: email@example.com
The result was a slump which crippled the economy in a way that has few parallels in history. Most economists understand that in situations like this it is ridiculous to insist that the debtor pays all the money back. For basic Keynesian reasons this insistence just destroys the ability of the debtor to pay: it is not a zero sum game between creditor and debtor. This is why so much of German debt was written off after WWII, as we noted in our letter.
…It did not help that the dominant voice in the Eurogroup was a German government that frequently appeared not to understand basic Keynesian economics, but as we know in the UK that kind of thing can happen anywhere. It did not help that the IMF overrode its own procedures in assessing whether debts could be repaid under pressure from key European governments. It did not help that many of the conditions the Troika imposed on Greece as structural reforms were counterproductive in helping the adjustment process.
But the major lesson I draw from all this is that intergovernmental loans within the Eurozone are a very bad idea, because they just encourage creditors to be stupid. Outside the Eurozone, once a debtor economy has achieved primary surplus it can default on its debts and that gives it some power over creditors. That helps prevent disasters like Greece happening elsewhere. Inside the Eurozone the creditors have too much power, because they can threaten to cut off money to a member’s banking system or throw you out of the club. The Eurozone has not learnt this lesson for obvious political reasons, which makes it a dangerous club to join. If you are unfortunate to live under a Eurozone government that secretly borrows too much, many more of your countrymen will die as a result of being in the Eurozone.