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Suicides, a neo-Nazi party in Parliament, and a failing medical system. Writing down Greek debt means lenders will sustain short-term losses. But in return they will get long-term stability and economic growth.
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This week’s gridlock over Greece’s next round of bailout funds underscores an unsettling reality that Europeans would do well to realize sooner rather than later: For Greece, default is the only option.
Indeed, a managed write-down in the near future will bring about the best possible outcome for all concerned parties: the Greek people, their investors and the politicians who have staked their careers on combating the crisis. The current economic, financial, political and social environment cannot endure the status quo.
Over the past three years, it has become abundantly clear that the bailout-for-austerity approach is engendering unsustainable fiscal conditions in the European periphery. Despite receiving €148.6 billion in bailouts from lenders, strict austerity orders and, in March, a 74% write-down on the face value of its privately held debt, the Greek debt burden continues to grow. Meanwhile, the country’s economy has contracted more than 20% since 2009.
The Hellenic Statistical Authority now estimates that Greece’s debt-to-GDP ratio will reach 200% in 2016, from about 176% today. This stands in stark contrast to the original May 2010 bailout program’s projection of a 148% debt ratio by 2020, or the EU’s projection in March 2012 that Greek debts would fall to 145% in the next eight years—both of which would still leave the country with an indefensibly high debt burden.
It is thus hard to escape the reality that Greece’s debts will not be repaid. The cost of Greek profligacy will be borne by European politicians, who will be forced to transfer large sums of money between countries to protect Europe’s financial system; by investors, who will be forced to accept reductions in the value of their holdings; and by ordinary citizens, who will be forced to accept higher inflation as a means of eroding the real value of debt. Continuing to pretend that Greece will ever fully repay its debts will only make the extent of these painful outcomes more acute when they materialize.
Greece’s fiscal collapse has been accompanied by a disintegration in the Greek financial system, since bankers can anticipate almost nothing about the future of the country. No stable consumer base exists in Greece to drive consumption demand, exports have fallen sharply and investment growth has been negative for more than five years. Investors would be foolish to bet on earning returns from Greece anytime in the near future, and the massive capital flight from Greek markets reflects this reality.
However, Greece’s current situation was caused not just by bad economics. The country is the product of a sinister social experiment in which Greek culture has been cannibalized by special interests and rent-seeking lobbies. Greek unemployment has risen for 39 consecutive months and now stands at 25.4%. Real wages have fallen, and economic dysfunction has given place to political extremism. The Greek Parliament is now home to vocal minorities that support landmines, neo-Nazism and the introduction of war tribunals for financial officials.
Against this backdrop, it is easy to see why the social fabric in Greece is disintegrating. Research done at the University of Cambridge has shown that between 2007 and 2009, the Greek suicide rate rose by 19%. Every additional percentage point increase in unemployment has led to an additional 0.8% increase in the suicide rate. These statistics may actually understate the problem: The Greek Health Ministry found that the Greek suicide rate was 40% higher in 2011 than in 2010.
Depression has placed a severe strain on the underfunded medical system, and suicidal Greeks now face a three-month waiting period to see a mental-health professional. Official statistics on child and spousal abuse are a few years old, but a recent rise in long bone injuries among young children in Greece suggests a sharp increase in child abuse.
The persistence of social conditions like these is unconscionable. But perhaps just as importantly, it indicates that the political fundamentals of southern Europe are much weaker than European politicians pretend. Stable governance and peaceful elections are not guaranteed, and so long as social conditions continue to deteriorate, political protests will grow larger and more violent. The scope of the protests in recent weeks should already have been enough to convince Europe that the government of Antonis Samaras is living on borrowed time.
This is why the IMF is now publicly advocating for a write-down on Greek debt. But euro-zone finance ministers are deadlocked because their careers depend on seeing Greece safely through the crisis. In particular, German politicians worried about re-election in late 2013 must convince their electorates that betting on Greece was a good idea. Southern European politicians must also protect their countries from the possible contagion of a Greek meltdown.
But it’s time now for these governments, and in particular German Chancellor Angela Merkel, to stop running for re-election and instead start trying to save Europe from political, economic and social disarray. By allying with the IMF to help initiate a managed write-down of Greek debt, the downward tailspin of peripheral European economies can be brought to an end sooner rather than later.
Immediately reducing the real value of Greek debt to less than 100% of GDP would require massive coordination between the EU and IMF, and it would require sovereign, multilateral and private-sector lenders to take agonizing losses. But only by reducing Greece’s debt by this amount can Europe ensure that Greece’s social and economic climate will recover.
In such a scenario, financial lenders will sustain short-term losses. But in return they will get long-term stability and economic growth. Politicians who promised their electorates that write-downs were avoidable will be embarrassed. But they will set Europe back on sustainable footing. And the Greeks, who have lived the nightmare of recession for five years, will begin the hard task of building a stable Greek economy. For Greece, default is the only option.
Mr. Hanson is an economics researcher at the American Enterprise Institute.
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