SEATTLE ― Greece is following the road taken by several other crisis-ridden emerging economies over the past 30 years. Indeed, as I argued earlier this year, there are stunning similarities between this once-proud eurozone member and Argentina prior to its default in 2001. With an equally traumatic implosion ― economic, financial, political, and social ― now taking place, we should expect heated debate about who is to blame for the deepening misery that millions of Greeks now face.
There are four suspects ― all of them involved in the spectacular boom that preceded what will unfortunately prove to be an even more remarkable bust.
Many will be quick to blame successive Greek governments led by what used to be the two dominant political parties, New Democracy on the right and PASOK on the left. Eager to borrow their country to prosperity, they racked up enormous debts while presiding over a dramatic loss of competitiveness and, thus, growth potential. Some even sought to be highly economical with the truth, failing to disclose the true extent of their budgetary slippages and indebtedness.
Having borrowed far too much after joining the eurozone in 2001, New Democracy and PASOK let their citizens down when adjustments and reforms were needed after the 2008 global financial crisis. An initial phase of denial was followed by commitments that could not be met (indeed, that some argued should not be met, owing to faulty program design). The resulting erosion in Greece’s international standing amplified the hardship that citizens were starting to feel.
Hold on, I hear you say. For every debt incurred there is a credit extended. You are right.
Greece’s private lenders were more than happy to pour money into the country, only to shirk their burden-sharing responsibilities when the artificial boom could no longer be sustained. The over-lending was so widespread that at one point it drove down the yield differential between Greek and German bonds to just six basis points ― a ridiculously low level for two countries that differ so fundamentally in terms of economic management and financial conditions.
Overeager creditors willingly underwrote this absurd risk premium. Yet, when it became abundantly clear that Greece’s debt burden had been taken to insolvency levels, creditors delayed the moment of truth. They dragged their feet when it came to the critical agreement on orderly burden-sharing (that is, acceptance of a “haircut” on private-sector claims on Greece). And the longer they did that, the more money left Greece without any intention of returning.
But neither the Greek government nor its private creditors acted in a vacuum. Both took comfort from the political cover provided by the European unification effort ― a historic initiative aimed at securing the continent’s well-being through closer economic and political integration on the basis of credible rules and effective institutions.
On both counts ― rules and institutions ― the eurozone fell short of what was required. Remember, the large core economies (France and Germany) were among the first members to breach the budgetary rules that were established when the euro was launched. And European institutions proved toothless when it came to enforcing compliance. All of this served to sustain the fantasy world that both Greece and its creditors happily inhabited for far too long.
Europe also failed to react properly when it became obvious that Greece was starting to teeter. European government counterparts failed to converge on a common assessment of the country’s problems, let alone cooperate on a proper response. While they grudgingly loosened their purse strings to support Greece, the underlying motives were too shortsighted, and the resulting approach was strategically flawed and abysmally coordinated.
Finally, there was the International Monetary Fund, the institution charged with safeguarding global financial stability and being a trusted adviser to individual countries. It appears that the IMF succumbed too easily to political pressures during both the boom and the bust. Political expediency seems to have trumped analytical robustness, undermining both the IMF’s direct beneficial role and its function as a policy and financial catalyst.
On the surface, each of the four suspects has an individual case for arguing that the finger of blame should be pointed elsewhere. They could even argue that, at worst, they were uninformed accomplices. But that is not really right.
None of the four can avoid the reality that Greece’s collapse would not have occurred had they not been complacent during the boom and, subsequently, fulfilled their responsibilities during the bust so poorly. They sucked each other into a sense of false prosperity, only to trip each other up during the inevitable downturn. Now, one hopes, all four will be held properly accountable by their stakeholders and undertake serious self-evaluation.
Most likely, they will end up getting off too easy, especially compared to the real victims of this historic tragedy ― the most vulnerable segments of the Greek population, who will become much worse off, today and for many years to come, as jobs disappear, savings evaporate, and livelihoods are destroyed. And they may not be alone. Millions of others may experience collateral damage, as financial contagion risks spreading to other European countries and to the global economy as a whole.
In a fairer world, these vulnerable citizens would be entitled to claw back the salaries, official privileges, and bonuses that the four parties to blame enjoyed for too long. In the world as it is, they are a compelling lesson for the future.
By Mohamed A. El-Erian
Mohamed A. El-Erian is CEO and co-CIO of PIMCO, and author of “When Markets Collide.” ― Ed.
(Project Syndicate)