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Debt – obesity of our time?

Debt – obesity of our time?

One of the most common problems of our lifestyle is… running into debts. It is a nightmare of economic overweight. The prime example of unhealthy lifestyle in this area is Greece. We interviewed Dr Magdalena Trzcionka from the JU Institute of Political Sciences and International Relations about the causes and effects of economical crisis.

Piotr Żabicki: When we look at the media coverage from the world, it appears that only Greece is living on borrowed time.

Dr Magdalena Trzcionka: The problem of running into debts affects societies and nations in Europe, as well as on other continents. However, Greece indeed appears in the media more frequently than others. This is because the Greeks have been spending more than they could earn for several decades. With cream-covered nose, Greece promised self-control and balance and quietly slipped into the euro area and joined a union of states which are very strict about their financial fitness. When the crisis came, she was not able to lift her pot belly any longer and fell down, incapable of going any further. Now that she has been put on a drip, she grumpily complains that this is humiliating and she is going to take her ball and go home.

Loosening the belt

I imagine that the Greek self-indulgence was not born yesterday.

Ever since the 1980s, Greece has been spending a lot more than it should. What is more, the improvement was needed in so many areas (high social expenses, inefficient pension system, increasing cost of debt service – sounds all too familiar, right?) that the successive governments did not even try to introduce the reforms necessary for the economy to become  developed and competitive.

To enter the eurozone, Greece had to work on her figure. And every fatty knows that tightening the belt is very often quite painful. So, the governments first tried to punch extra holes in the belt. The idea seemed attractive at the time. Instead of saving, the Greeks chose to increase their income, which would work if the excess money was not squandered on new expenses. The changes proved insufficient to fit into the corset of convergence criteria. However, Greece wanted to join the euro area so badly that it decided to "cosmetically retouch" the reports sent to the European Commission.

But there was simply not enough momentum to continue in this fashion for another decade. The Greek economy needed thorough reforms. Instead, the Greeks choked on cheap currency and carried on living on borrowed money.

Greece adopted the euro quite a while ago. Why does it only now begin to suffer the consequences?

The idyll was abruptly interrupted by the financial crisis, which exposed Greece's economy as weak. Now on the verge of bankruptcy, Greece turned to its fit European friends, the eurozone states, for help. It was an offer they could not refuse, since most of the debt was owned by German and French banks. The euro states faced a difficult choice. They could either punish Greece for sending false reports and let it become bankrupt (which carried the risk of tremendous financial losses and destabilising the European market), or provide financial aid, enabling Greece to pay off its debts and tranquillise the situation on the market. Although both solutions were controversial, the euro states chose option B.

The financial aid provided by a tripartite committee formed by the European Commission, the European Central Bank and the International Monetary Fund – known as "the Troika" – was hedged with a series of regulations which required Greece to conduct a series of  fundamental reforms. It was no longer about tightening the belt – this time, it was about a strict diet. However, the one-time 240 billion euro cash injection did not change much. The GDP fell by 25%, and the unemployment rate reached an all-time high at 27% (sic!) in 2012. The banks agreed to write off 50% of the debt in exchange for paying of the rest of aid package. Currently, most of Greece's debt is owned by the Troika's governments, which means that the risk of bankruptcy is transferred to European taxpayers. Which is curious, considering that it was not them who have borrowed the money in the first place.

…or I will take my ball and go home!

So we are in a stalemate. The debt is not only sort of an unstable angina for Greece, but also a symptom of a general disorder in Europe.

Greece – the cradle of European culture – has turned into a debt slave before our very eyes

Debt is an addiction. Debt is slavery. Even the Code of Hammurabi from the ancient Mesopotamia allowed for a situation in which a wealthy person could become a slave because of debt. In such a case, they could sell themselves or members of their family into slavery. If they chose to do the former, they usually remained enslaved until death. Greece – the cradle of European culture – has turned into a debt slave before our very eyes.

Greece currently owes its creditors nearly 330 billion euro and is insolvent. The debt will be paid by future generations over the next 30 years. What about their debt? Well, rinse and repeat. The only rescue for Greece is writing off a part of the debt. But that could create a risky precedent. What if other states similarly threaten to leave the eurozone if their demands are not met?

For the Greeks, budget cuts turned out to be a diet that no one wants to adhere to. After a wave of protests, the newly elected left-wing government effectively threatened the Troika with what became known as Grexit (Greece + exit). It is still a menace to one of the key ideas of a unified Europe – a common currency.

In this context, how can we perceive the re-election of Alexis Cipras and the Syriza party in last September's elections?

For Syriza, the results of these elections are a reward for a long fight for Greek rights on the European forum. Cipras' victory seems partial, however, because although it strengthened his position as a leader on the Greek political scene, it also puts him in a much more difficult situation. Greek economy is still in shambles: the debt and unemployment are increasing, and soon the taxes will follow suit. The new government will have to convince people to support a series of thorough, painful reforms. If it chooses to act firmly, people will show their dissatisfaction by taking to the streets. If they choose to bide their time, they may lead the country to yet another recession. We will very soon see what kind of diet Cipras chooses. The most important challenge he will face will present itself in the first half of 2016, when the next portion of the Greek debt is scheduled to be paid.

Indigestion and rain of riches

Let us imagine that Greece indeed leaves the euro area. What then?

Reality is governed by the principles of cause and effect. If Greece chose to depart from the eurozone, it would leave an indelible mark on Greek economy, the economy of its trade partners and all investors conducting transactions in euro. The return of drachma as currency would surely cause inflation. Euro's rate of exchange would plummet. The cost of Grexit could be very high.

Also, Greece leaving the eurozone would also strike a blow to the already crumbling ideals of European solidarity, cooperation, and communality. Disinterest in writing off a part of Greece's debt and lack of consensus when it comes to the Greek crisis will increase distrust between member states.

And what about the migrants? How do they fit into the whole situation?

Massive migration from Africa and the Middle East will destabilise the situation in the region. This could be used by the world superpowers to strengthen their position in the international arena. The first one is Russia, which, although it has problems of its own, will not spare expenses to win this geoeconomic game. The second one is China, and the third one – Germany. Will Angela Merkel allow Grexit to happen and go down in history as a chancellor who could not prevent the dissolution of a financial union? The crisis in Greece and its socio-political consequences are causing indigestion even across the ocean. President Obama suggested that the European leaders should do everything in their power to resolve the conflict, including cancelling a part of Greece's debt. For the United States, Greece is not just one of the European Union countries, but also a strategic partner in the NATO.

Economy is a system of communicating vessels which abides by the laws of nature. While the Greek money evaporates, a rain of riches is pouring down somewhere else…

Original text: www.nauka.uj.edu.pl

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