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Democracy versus capitalism – how Greece should survive

Greek demonstrationIt is difficult for us to comprehend what the Greek people have been subjected to. After the 2008 crash UK unemployment rose to 8%; in Greece it is still 26% with youth unemployment at over 50%. UK GDP fell by 9%; Greek GDP collapsed by 25%. What is remarkable is not the momentous Syriza victory a week ago, but rather that it didn’t happen earlier.

The idea that now the Syriza demand for some easing of the crushing weight of Greek debt at 177% of GDP could be dismissed out of hand by those whose policies have manifestly failed in pushing the whole eurozone into deflation seems inconceivable. But clearly the Germans are determined to take that line, and insist that because the Greeks borrowed the money they are duty bound to pay it back whatever the cost. This self-righteousness however is not tenable.

The German banks piled into Greece because they saw it as offering the best capital returns at that time. but those who lend have a moral responsibility to lend prudently and wisely. If they fail to do due diligence on their borrowers, then they deserve what they get. At that time the extent of the Greek deficit was entirely apparent, as was the way that the Greek state was run. The Germans employ a second argument in defence of their demand for total payback. They say the rest of the eurozone has been very generous to the Greeks, so they deserve full reimbursement. But these large loans from the eurozone and IMF went, not to benefit Greek households, but to avoid the write-down of bad loans to the Greek government and Greek banks or for interest payments. Of course the lenders could have been bailed out directly, but that would have been too embarrassing an exposure of what was really at stake.

So what should now be done? If Greece is pushed to a default by a rigid uncompromising Germany, it will force an exit which would be disastrous for Greece in the short term, but also reveal that the eurozone hinged around a hard-line exchange rate peg, not a genuine monetary union. Alternatively, Greece could be offered a lowering of the present value of interest and repayments; but that is a short-term fudge which fails to address the moral case for debt relief. What is really needed is an offer of significant debt relief – say halving Greece’s debt and the required fiscal balance – in exchange for real reform. It would reduce Greece’s debt below 110% of GDP which eurozone ministers agreed to in 2012, but be conditional on serious reform of State corruption and the traditional oligarchy which Syriza have shown themselves determined to achieve.

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