Greece's Austerity Dilemma
The outcome of Sunday's referendum was as much a rejection of an ongoing policy as it was disapproval of the Eurogroup's bailout proposals.
Greece is now in uncharted territory. The final tally of Sunday’s referendum had 61 percent of Greeks voting“no” and 39 percent “yes” on whether or not to approve the current bailout plan from Eurogroup leaders. The outcome was a victory for Prime Minister Alexis Tsipras, who had strongly urged citizens to reject the deal—but now Greece must return to the negotiating table to discuss a new plan with its creditors.
On Monday, Greece’s finance minister Yanis Varoufakis quit, believing that negotiations might proceed more smoothly if he was absent. He will be succeeded by Euclid Tsakalotos, Greece’s deputy foreign minister who also served as the coordinator of the negotiations between Athens and its creditors. Varoufakis posted a statement on his blog that makes clear what Greece is looking for from its creditors: “It is, therefore, essential that the great capital bestowed upon our government by the splendid NO vote be invested immediately into a YES to a proper resolution—to an agreement that involves debt restructuring, less austerity, redistribution in favor of the needy, and real reforms.”
The final referendum vote was largely a rejection of austerity and the measures at the heart of the debate on the current Greek debt crisis. The country’s unemployment rate is currently 25.6 percent, and GDP has been plummeting since the first bailout, despite optimistic forecasts that predicted the bailout deals would bring the Greek economy back to life.
Even before the referendum, economists have been calling for an end to austerity in Greece. Among them: Joseph Stiglitz, Paul Krugman (who’s been at the forefront of arguing against austerity), and Jeffrey Sachs. Though economists were divided on how Greeks should have voted in the referendum, even the ones in the “yes” camp agreed that cuts have gone too far.
Austerity has been called a dangerous idea precisely because it doesn’t seem to reduce debt. However, the European Central Bank published a paper earlier this year which argues the opposite. The debate over whether austerity actually works was reignited two years ago when a group of researchers found flawed data in one of the proofs that suggested its efficacy—Reinhart-Rogoff’s “Growth in a Time of Debt.”
What struck me while I was writing is that Germany is really the single best example of a country that, throughout its history, has never repaid its external debt. Neither after the First nor the Second World War. However, it has frequently made other nations pay up, such as after the Franco-Prussian War of 1870, when it demanded massive reparations from France and indeed received them. The French state suffered for decades under this debt. The history of public debt is full of irony. It rarely follows our ideas of order and justice.
