by George L. Perry
April 28, 2015
Greece’s government borrowing has become the most contentious sovereign debt crisis in memory and also the longest running. How this crisis gets resolved may determine whether the still fledgling eurozone survives in something like its present state. The whole episode reminds us that what made the eurozone attractive also left it vulnerable to shocks. Formerly soft currency member countries enjoyed lower borrowing costs because of the greatly lowered exchange rate risk. This helped countries like Greece to borrow, invest and prosper in the years after the euro was launched. In hindsight, this was probably an unsustainable boom under any conditions. But when the Great Recession hit, the downward impact on Greece was amplified, by both the great increase in debt and the absence of devaluation as a buffer. Greece could not meet its sovereign debt obligations, and the crisis was on.
Since the credit crisis first emerged in 2009, the other nations of Europe, the European Central Bank and the International Monetary Fund have all supported debt relief in many forms. And not surprisingly, the relief has always come with conditions on matters such as budget deficits, privatization, and government employment. Many of the conditions were politically unpopular in those countries and imposed fiscal austerity on the economy. The recession deepened into depression, the capacity to service debt worsened rather than improved, and the tensions between Greece and its creditors only intensified.