by Anders Aslund
Peterson Institute for International Economics
January 29, 2015
The victory of the extreme left-wing party Syriza in the Greek parliamentary elections on January 25 is a wake-up moment. The outcome of the ensuing economic policy discussion is likely to be decisive for Europe for a long time. Two opposing views were recently published in the Financial Times illustrating the dilemma facing the region. Reza Moghadam argued that the European Union should write off half of its debt to Greece, while Gideon Rachman contended that now Europe could not afford to forgive any debt to Greece.
Meanwhile, Paul Krugman hailed Alexis Tsipras, leader of Syriza, in the New York Times as “the first European leader elected on explicit promise to challenge the austerity policies that have prevailed since 2010.” After all Greek markets plummeted by a fifth over three days, Krugman backpedaled. “Markets are panicking,” he asserted. Then, implausibly, he added: “It’s important to understand that this is not a verdict on the new Greek government, or at any rate only the new Greek government; it’s a judgment that the risk of no agreement, and a disorderly breakdown of the whole process, is high.”
Greece has a long history of bad economic policies, eminently analyzed by Nikos Tafos in his 2013 book Beyond Debt: The Greek Crisis in Context. Since Andreas Papandreou came to power in 1981, Greece has stood out as a model of fiscal irresponsibility. Greece had an average budget deficit of no less than 8.7 percent of GDP from 1981–99, and Papandreou ruled 11 of those years. His was a parasitical and oligarchic regime that used socialism to rebuild an old clientele system of poor governance.