Greece austerity: Eurozone leaders won’t back off because of the vastly different economic cultures of northern and southern Europe.

The Real Reason Greece Can’t Get a Debt Deal From Eurozone Leaders

The Real Reason Greece Can’t Get a Debt Deal From Eurozone Leaders

Moneybox
Commentary about business and finance.
Feb. 6 2015 5:47 PM

The Two Europes

Greece failed to sell eurozone leaders on debt relief this week. That’s because culturally they’re living on different continents.

Alexis Tsipras
Greek Prime Minister Alexis Tsipras attends a swearing-in ceremony at the Greek Parliament in Athens, Feb. 5, 2015.

Photo by Kostas Tsironis/Reuters

This week, Greece’s new prime minister, Alexis Tsipras, and his black jeans–clad, Yamaha-riding finance minister, Yanis Varoufakis, toured Europe, hoping to persuade eurozone leaders to lessen Greece’s more than 315 billion euro debt load, on which it is in danger of defaulting. Tsipras was elected last month in a landslide on an anti-austerity, anti-corruption platform—one that appealed especially to the young, unemployed, and poor Greeks who have seen decreased wages and rising unemployment since the eurozone bailout almost five years ago. Greece is looking to finalize a deal to stay afloat so it can remain in the European Union, but for now, after meeting with the leader of the European Central Bank and representatives of the British, French, Italian, and German governments, Tsipras and Varoufakis ended the week empty-handed.

Throughout the week, Varoufakis kept saying there would be a deal in days. There wasn’t. On Wednesday, the European Central Bank announced it would no longer accept junk-rated Greek government bonds as collateral for funds. It was a rejection of Varoufakis’ plea for a loan that would be a bridge to meet Greece’s obligation of payments to avoid a default. German Finance Minister Wolfgang Schäuble then blamed Greece—not Europe—for its economic woes. The unintentional lesson: The reason Europe’s austerity hasn’t worked has as much to do with Greece’s fiscal imprudence as it does with the cultural dissonance among the eurozone’s wildly divergent economies.

Europe isn’t one economic, political, or cultural system, but you wouldn’t know it from the way fiscal policy in the eurozone is governed. The austerity program that Germany, Belgium, and other northern European countries have pushed—a combination of spending cuts, lower deficits, and other economic reforms required by creditors in exchange for bailout loans—is rooted in their cultures’ Protestant sensibilities. The German word for “debt”—schuld—is also the word for “blame.” In contrast to the more laissez-faire attitude of the Greeks, northern European culture considers being indebted tantamount to sinning. This notion justifies the punishment of austerity, not the reward of a stimulus. “For Germany, debt is something that should be serviced,” says Pavlos Masouros, a professor of corporate law at Leiden University in the Netherlands who is also an Athens attorney.* “We somehow treat an economic problem of insolvency with a stigma, with ethical arguments.” There’s a joke that if Martin Luther were still alive, he never would have rubber-stamped the formation of the EU, so schismatic are its members’ differences.

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This cultural gulf between north and south is part of the reason the EU has no equivalent of a bankruptcy code for handling government insolvency. There are political reasons, too. Northern European countries want flexibility in how to handle countries with deficits. But some say that ends up harming countries like Greece, where, because of the lack of a predetermined scheme to handle massive debt loads, foreign investors end up picking up real estate on the cheap or buy out state-owned enterprises. “The bailout problem led to a devaluation of life that created opportunities for foreign investors from China, the U.S., and the United Kingdom,” says Masouros.

The continent’s culture of debt isn’t limited to the south, of course. It’s true that the International Monetary Fund and eurozone countries already have loaned Greece about 250 billion euros since the 2010 bailout. But it’s ironic, if not hypocritical, for Germany to stand on such high moral ground. In 1953, the Allies agreed to the London Debt Agreement that wrote down Germany’s debt by 50 percent and extended its time to repay it. It also allowed Germany to re-enter the capital markets. Scholars agree that debt forgiveness helped Germany to get back on track and become one of the strongest economies in the world. In the postwar period, if the western Allies had seen the obligations of Germany arising as moral or ethical hazards, they never would have forgiven them. The problem was solved rationally, not morally. That history hasn’t been lost on Tsipras, who invoked the issue of war reparations for Nazi crimes during World War II in an effort to shame Germany for its culpability.

The cultural roots of austerity have not been kind to Europe’s southern tier. (Greece isn’t alone; Spain and Cyprus aren’t particularly fiscally sound, either.) For years, Europe has been on the road to privatization. In 1992, the Maastricht Treaty that established the European Union accelerated competition by creating rules that would separate government from enterprise. “Convergence criteria,” for example, barred a deficit greater than 3 percent and a national debt higher than 60 percent of a country’s gross domestic product. The idea was that it would encourage selling off assets. But, even though there was a rush to join the EU, not all of its economies adapted well to privatization or still hold up that model as paramount, as the election of the Tsipras’ far-left Syriza party demonstrated. The new prime minister requested the resignation of several officials in the Hellenic Republic Asset Development Fund, the entity required by the bailout to implement privatization projects.

What is still plaguing Europe is that the treaty underestimated how deeply entrenched its wildly divergent economic cultures are. Germany relies heavily on the exports of manufactured products to foreign countries. Italy has a trove of industry in the north but problems similar to Greece in the south. Spain’s agriculture and service sectors are most active, with business in South America providing a solid revenue stream. Shipping and tourism are two of Greece’s biggest economic sectors. State enterprises are still paramount, as the public sector comprises about 40 percent of GDP.

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The EU was designed to integrate the economies and create a common currency that would facilitate trade and create an economic powerhouse, but that also meant it was forced to fuse its varied economic traditions. When Greece joined the EU, it reportedly had a much higher deficit than it claimed. It sought loans well before the 2009 recession, and then in 2010 the country became locked in the Memorandum of Understanding, the bailout program for how Greece would run that was supervised the ECB, the IMF, and the European Commission. Within four years, the Greek economy, with its rampant unemployment and weakened consumption power, shrank about 25 percent. While Greece’s deficit miraculously dropped to 4 percent, debt payments and other austerity measures such as labor reform have made the public impatient.

Now that the Greek electorate has elected Syriza, the eurozone can’t ignore Greece’s economic culture. You might even argue that Germany and others from the north have emboldened the political reformers who are vehemently against German-led austerity. As British Finance Minister George Osborne said Monday at the start of Varoufakis’ tour, Greece’s fiscal crisis “is fast becoming the biggest risk to the global economy.” Indeed, Varoufakis has expressed interest in a New Deal–style stimulus program to rebuild its infrastructure and spearhead growth, but it’s hard to see how that vision can become a reality when the country is insolvent, with no deal in sight.

In a press conference Thursday, Varoufakis asserted that Europe can’t pretend that the Greek electorate doesn’t exist. “You may not like the fact that we were elected … but use us in the context of the European project to turn the page in Greece and in Europe.” If Greece is permitted to thrive economically and still be Greece, all of Europe will be indebted to it.

Correction, Feb. 7 2015: This article originally misquoted Pavlos Masouro, who said, “For Germany, debt is something that should be serviced,” not that it should not be serviced.