Greece Monkeys

European Union officials had delivered their umpteenth plan for Greece to continue making payments on its unpayable debt, which now runs into the hundreds of billions. To their horror, Greek prime minister Alexis Tsipras, head of a coalition government led by the neo-Communist Syriza party, put the question to the Greek people. Despite a heavily funded campaign in favor of the debt plan, voters rejected it by 61 percent to 39. As we went to press, Greece was meeting with EU officials to work out whether it will be possible for the country to remain in the euro, the currency that 19 of 28 EU countries share. Christian Noyer of France’s central bank has warned that without a deal Greece could face “riots and chaos.” The European financial press, overwhelmingly sympathetic to the project of binding Europe’s countries ever more closely into the EU, says Greece is facing its last chance.

That is only half the story. This may also be the EU’s last chance. In 2010, its two dozen countries discovered that Greece, one of the weakest economies among them, had accumulated debts equal to its annual output. Europe’s economists and journalists had a field day exposing Greek cronyism and featherbedding. Experts from the so-called Troika (the European Central Bank, the European Commission, and the International Monetary Fund) crafted a Memorandum of Understanding to get matters under control. Their program of tax hikes, budget cuts, and regulatory reforms has been a catastrophe, turning a heavily indebted economy into a heavily indebted and idle economy. For five years, Greece has run as tight a fiscal ship as any European country, yet its debt-to-GDP ratio has nearly doubled, to 178 percent. A third of the loans at the country’s four largest banks are in arrears. In June, Greece became the richest country to default on a payment to the IMF. Certainly there has been corruption. Greece is a country of 11 million with 2.65 million retirees. But, as it was in the Asian currency crises of the late 1990s, corruption has turned out to be a red herring. The larger problem is the misdesign of the euro.

Lending to Stavros

Greece’s euro trouble arose in the wake of the U.S. subprime crisis—and largely because it struck investors as analogous. In both cases a credit system was distorted by an ulterior motive. Depending on whether you like the motive, you could call it idealism or social engineering. In the United States in the 1990s, we were told that the difference in rates of loan approval between neighborhoods was due largely to racism—what the Clinton administration called “redlining.” Once you got over your bigotry, it was as safe to lend to people in the slums as to people at the country club. At about the same time, apostles of the EU convinced Germans (who borrowed at 5 percent) that a currency it shared with Greeks (who borrowed at 18 percent) could be as strong as the deutsche mark they had spent half a century firming up. Once you got over your bigotry, it was as safe to lend to Stavros as to Stefan.

For a while it appeared so. On both continents, lenders took the rhetoric as a sign that the government would make them whole if loans went bad. In America, Fannie Mae and other government-protected lenders could offer loans at a lower rate than nongovernment ones. In Europe, Greek, Irish, Italian, and Portuguese interest rates converged with the German ones. Naturally, borrowers in those countries took advantage of the credit. It is easy to forget that, 20 years ago, consumers did not expect to be preyed upon by financial institutions, as they do now. It had been generations since the last wave of bank runs. To Greeks, those unbelievably cheap loans in Germany’s currency appeared risk-free.

That did not make Greece Germany. Globalization brings prosperity because it brings specialization. Germany specialized in making Mercedes and designing precision machinery. Greece specialized in growing olives and changing tourists’ beds. Southern European countries began running large current-account deficits, which were covered by money borrowed from the north, and in 2010, the system blew up.

Europe resolved the collapse in a way that has brought discredit on the Troika. Greece’s budgets were certainly a mess—but what made them a mess worthy of emergency summits is that most Greek debt was held by opaque French, German, Dutch, and Italian private banks. Less than two years after the collapse of Lehman Brothers, officials feared that any forgiveness of Greek debt might cause these banks to collapse in turn. The “bailout” was not intended to bail Greece out. It was intended to remove risk from the banking system and to transfer it, in violation of EU treaties, to the countries that belonged to the EU. German banks, which had held about $35 billion of Greek debt, reduced their exposure to under $10 billion or so, or about as much as the United States had. French banks’ exposure, which had been around $60 billion, fell close to zero. It was they who were “bailed out.” Greece’s debts remained what they were. The Jubilee Debt Campaign, a London-based lobby, claims that, of the quarter-trillion euros ($277 bilion) that has been “lent” to Greece since then, all but $21 billion has gone into debt payment; $256 billion has passed directly to creditors.

The International Monetary Fund was raided by the EU. Part of the postwar economic system set up by the Roosevelt administration, with the help of John Maynard Keynes, the IMF oversees the world currency system, much as its sister organization, the World Bank, oversees economic development. Over the years, a cozy arrangement developed in which a European always got to lead the IMF and an American the World Bank. Under Dominique Strauss-Kahn, the IMF made a highly irregular loan (called an “exceptional access standby arrangement”) to Greece, the largest in its history. The European political class put the collateral of the world’s countries, including the world’s poor countries, on the line to allow an orderly unraveling of a bank deal gone wrong. The ultimate purpose was to rescue a utopian project of the same European (not Greek) political class: the euro.

Ambrose Evans-Pritchard of London’s Daily Telegraph has therefore asked whether we are right to focus on Greece at all. Evans-Pritchard is a conservative writer whose well-informed essays on European finance are a bracing contrast to the conservative sloganeers in the United States, who often write as if the virtuous party in any dispute were always the one with the most money. “The currency union itself is delinquent,” Evans-Pritchard asserts. He is right. Greeks could borrow what they did because they were now members of a rich family. If Brad Rockefeller walks into a casino in a soiled T-shirt and runs up a million-dollar debt that neither he nor his family will repay, what was the casino’s mistake? Trusting some T-shirt-wearing guy or trusting the Rockefellers?

Tiramisu instead of democracy

Had Greece’s government demanded total debt forgiveness back in 2010, a time of severe financial jitters, they might well have got it. By eliminating the dangers of contagion, the EU seemed to have eliminated any threat posed by Greek democracy to the smooth running of its institutions. But there was another source of problems: German democracy.

In a way, democracy-evasion is the EU’s point. When referenda are decided in favor of EU institution-building, they become part of the acquis—written-in-stone, irreversible laws, as when the French joined the Maastricht arrangements that led to the euro by a handful of votes in 1992. When referenda run against EU institution-building, citizens are invited to vote again until they “get it right”—and add these new institutions to the acquis. That happened when Denmark rejected Maastricht, and when Ireland rejected the Nice treaty in 2001 and the Lisbon treaty in 2008. (The principle is similar to the one under which three dozen U.S. referenda rejecting a right to gay marriage are meaningless, but three accepting it constitute a profound and irrevocable statement of values.) Where votes have gone so badly against the EU that they are unlikely to be reversed (as in the rejection by the French and the Dutch of the EU constitution in 2005), authorities agree to forget the whole thing ever happened, and pass the same measures in the form of treaties.

Vague complaints are often made about how, under Chancellor Angela Merkel, Germany “rules” Europe, as if Germany had lately begun throwing its weight around. But this misreads the source of Germany’s dynamism, which, all in all, has been a good thing for the EU. Germany is powerful only partly because it has lots of dough, a current-account surplus, and a badass attitude. The more important source of its power is that it has been slower than its neighbors to dismantle its democracy. For self-evident historical reasons, the German constitution, drafted with American help in the late 1940s, was made unusually robust against the blandishments of charismatic utopians. It was meant to slow things down and limit handovers of traditional powers to madmen, even if they have ideas that sound really, really exciting at first blush. Every fresh European bailout needs to pass the Bundestag and every handover of German sovereignty needs to be scrutinized by Germany’s supreme court.

A fresh extension of credit to Greece would require a German vote. A Greek default would require Merkel to hand her taxpayers a bill for loan “guarantees” that reaches almost a hundred billion dollars. And Germans have had enough of Greece. In recent days, even the Greeks’ traditional defenders in the Social Democratic party have taken to insulting them in public, as a way of demonstrating their bona fides to voters. But German democracy has served the Greek “side,” too. Thanks to their own constitutional punctiliousness, all German Bundestag members were recently given a copy of a stunning new report on debt sustainability by the IMF. It was then leaked to the Munich newspaper the Süddeutsche Zeitung. It showed that Syriza’s narrative about the utter unpayability of Greece’s debt is, as IMF economists see it, correct. Even under rosy assumptions, accepting the present reform package would leave Greece’s debt over 118 percent of GDP by 2030. The documents also showed that European Commission president Jean-Claude Juncker tried to con Greeks into believing that a $38 billion program to which all member states are entitled was some kind of fresh “investment” he had decided to bring to the table as a sweetener.

While Germany and Greece are adversaries in the matter of Greece’s debt, they share a constitutional predicament. In every European country, people were made a lot of promises about the neat things they’d be able to do in the euro, like traveling passportless and eating tiramisu in Irish country towns. But no one was ever told the truth about the ultimate goal of the European project—the extinguishing of the continent’s various nation-states and, with them, their cultures. What often hangs up the EU’s leaders is that this part of the project is incompatible with democracy, and the work of neutralizing democracy is incomplete.

Adult entertainment

The intellectual godfather of Europe, the businessman, diplomat, and lover of America Jean Monnet, once enthused that “Europe will be forged in crises, and it will be the sum of the solutions brought to these crises.” EU leaders often behave as if they have arrived at the stage of continental brotherhood in which virtue requires the smothering of national interests in the name of a wider sovereignty. But their project is looking more like yesterday’s wave of the future. Paradoxically, Europeans can be asked to get over their differences and melt into a wider Europe only if Europe is identifiably different from elsewhere—culturally, ethnically, religiously, politically. Europe’s leaders have been reluctant to assert that their continent is superior, special, or even idiosyncratic in any way at all, in contexts ranging from the welcoming of mass migration to purging Christian references from its laws to negotiating membership with Turkey. Those who believe Europe is no better or worse than anyplace else do not need a European Union. They already have the United Nations.

The other problem is that, as their utopia has grown less convincing, Europeans have grown less tolerant. They cannot handle ideological diversity. As the University of Texas economist James Galbraith, an adviser to Syriza, wrote of the excesses of European reformers in the American Prospect: “They aim to reduce the state; in this sense they are ‘market-oriented.’ Yet they are the furthest thing from promoting decentralization and diversity. On the contrary they work to destroy local institutions and to impose a single policy model across Europe.” 

This is exactly right. Former Belgian prime minister Guy Verhofstadt, the eurocrat par excellence, harangued Tsipras on the floor of the European parliament in Strasbourg days after the referendum. He denounced any choices Greece’s sovereign government might make—about cutting Greece’s military by 5 or 10 percent, about tax exemptions for churches, about tax rates in tourist towns—as defenses of “privilege.” Verhofstadt said: “Let’s end the privileges of your ship owners, of the military, of the Orthodox church, of the Greek islands, and the political parties who receive loans and money.” Galbraith calls this attitude “market Stalinism.” One can see his point when one considers the political capital expended in recent months by governments in France and Britain to pass laws allowing Sunday shopping everywhere. France’s prime minister Manuel Valls even risked a vote of no-confidence to ensure his fellow citizens could troll the mall for Xboxes and Wiis instead of eating coq au vin with their widowed mothers. Hungary’s prime minister Viktor Orbán has been accused of extremism for resisting the Sunday-shopping trend. Capitalism is apparently such a fragile and delicate plant that no vestige of non-market culture can be left standing, not even a centuries-old provision for a Day of Rest.

Syriza has plenty of Marxists in it. But what was really worst about communism in its heyday was not left-wing economics. It was the way Communist governments bullied their publics, jammed them into procrustean political arrangements nobody wanted, and punished free thinking. And in the battle between Syriza and the country’s creditors, it is by no means obvious that Syriza is the more authoritarian of the two sides. EU officials and their defenders often act as if belittling the Greeks will do the work of making coherent arguments against them. Their elected government is dismissed as a bunch of children. Ilmars Rimsevics, Latvian central banker, says Greece “has not done the necessary homework.” Chris Giles of the Financial Times writes: “You do not give treats to a misbehaving child.” IMF head Christine Lagarde said at a press conference in June: “The key emergency, in my view, is to restore dialogue with adults in the room.” (This is apparently an IMF priority, given the success of Lagarde’s predecessor and compatriot Dominique Strauss-Kahn in turning the IMF into an “adult” institution.)

Is Tsipras Chickening out?

On the eve of the July 12 emergency summit over Greece’s fate, the situation was paradoxical. Syriza was elected to run Greece because Syriza was the only party with the courage to state that the debt is not serviceable. And yet party leader Tsipras appeared open to another bailout deal built on the premise that it is. The Greeks gave a landslide majority in their referendum to steps that would hasten the country’s exit from the euro, yet 70 percent of voters tell pollsters they don’t want that. Every policy argument Tsipras makes points to the need for his country to reclaim the sovereignty that it handed over to Europe in 1981, yet every philosophical pronouncement he makes leaves no doubt that he would regard leaving the EU as a catastrophe. 

On legal grounds, Tsipras may not feel he can say he wants to leave the eurozone. In case of a rupture who would be liable for the unpaid debts to European taxpayers? Greece? Or Europe’s central bank and rescue funds? Hard to say, but here one does not want to be the party that reneges on a contract or violates a law. The left-wing economist Lapavitsas says in an interview with Jacobin magazine that, in the event of a rupture, figuring out where responsibility lies for various payments would take “an army of lawyers.” A weird thing about negotiations between Greece and the Troika is that both sides have acted as if they are trying to get the other side to leave the table in a huff. Germany’s finance minister Wolfgang Schäuble has accused the Greeks of not understanding basic obligations and made clear the EU would be better off if the country went back to its own currency. Greece’s former finance minister Yanis Varoufakis, an economics professor in Australia and Texas, called the Troika’s policy-makers “the biggest idiots in the history of economics.” Tsipras may be in the position of an employee who can collect unemployment if he’s fired but not if he quits.

On the other hand, Tsipras may just be chickening out, and indications on July 9 were that he would submit to a tough new austerity program. His party relies for its majority on a coalition with a conservative party that wants Greece to get its sovereignty back, and he has made nationalistic appeals to memories of the Greek resistance in World War II. But most “leftists” today are so frightened of nationalism that they would not know what to do if put in charge of a nation. While Tsipras has said little on such matters, his closest ideological ally, Pablo Iglesias, founder of Spain’s radical Podemos party, has. “The strategy we have followed,” Iglesias told the New Left Review this spring, “is to articulate a discourse on the recovery of sovereignty, on social rights, even human rights, in a European framework.” He hastens to add that he likens this to the Popular Front strategy of 1930s Communist parties in Spain and elsewhere. Those parties made temporary common cause with the bourgeois left and center as a stepping stone to power, but had no intention of compromising over the long term. So Podemos is an internationalist party. The parts of its message that involve “getting one’s country back” are an electioneering tactic, and the same may be true of Tsipras’s Syriza. At the end of the day, Tsipras favors the multilateral utopianism of the EU, but he wants it to reflect the values of the lecture hall, not the boardroom. That would explain why, in the aftermath of his triumph, he fired Varoufakis.

Still, Tsipras’s gambit has unleashed thoughts among other political actors that cannot be unthought. Indebted peoples, leftists, and nationalists across Greece and Europe are beginning to realize that they have not only reason to distrust the EU but also opportunity to change it. Russia, which in early July hosted a summit of the BRICS countries (Brazil, Russia, India, China, and South Africa), has grown close to Greece of late (president Vladimir Putin talked to Tsipras on Monday) and sees a chance to tip over the wobbling European consensus on the U.S.-led program of sanctions occasioned by its annexation of Crimea. And there are other countries in Europe. Were Greece kicked out of the euro, now or later, some other nation, possibly Italy or Spain or Portugal, would emerge as the community’s new laggard, its sick man, its black sheep. It would look to see whether Greece had done better inside the EU or outside. A terrible fear began to motivate the EU’s leaders this week—the fear not that Greece might die outside of the euro but that it might thrive.

Christopher Caldwell is a senior editor at The Weekly Standard.