Nobody Is Happy in the Eurozone Jamie Sneddon, Flickr
Eurodept

Imagine that you have a friend who owes you money. Quite a lot of money actually. That friend of yours used to live very indulgently, allowing himself vacations, fancy phones and tablets, working just a few days in the week, etc., thus spending much more than he actually earned. How did he do that? Well, he borrowed money from many different places, over and over again. Of course, after a while his lifestyle got him into a lot of trouble and at one point he was unable to pay his debts anymore. So, as you and your friend are partners in the same company, his debts and bad reputation mean bad reputation for you as well. Therefore, you decide to help him by giving him a big loan that will cover all his debts so far, but on the condition that he will stop spending so much and manage his budget reasonably. So far, so good. But after a few years your friend starts missing the good old days when he didn’t have to work much and he could buy and do anything he liked. He doesn’t want to pay his debt, he doesn’t want to limit his spending, nor does he want to increase his work hours. So, he declares that you are obliged to forgive his debt entirely and allow him to live as he used to, spending and borrowing as much as he likes. Until you bail him out again. And forgive his debt again. Until forever. He doesn’t only demand that, he also points a finger at you and yells that it is entirely your fault that he is in such a bad financial situation.

Quite insolent, is it not? Sounding familiar? Well, welcome to the Germany vs. Greece game. A game that is slowly becoming The North vs. The South, because Greece is not the only friend in the Eurozone company that borrowed money around the financial crisis of 2010s. There are quite a few of them – Spain, Italy, Ireland. 

Why we should not forgive the Greek debt

The Greeks want to go to a restaurant and after that they wait for the Germans and the French to pay the bill. But European taxpayers cannot pay the Greek bill forever. They never should have been obliged to do so, because Germany is not responsible for the insane amount of money that the Greek government kept spending for years. How is it possible that the governments of Finland, Netherlands and Germany always manage their budget and spending, while the Greek government never does so?

But aside from the question of justice, there are two major reasons why debt forgiveness is impossible.

As we mentioned above, Greece is not the only indebted country in the Eurozone. If we forgive Greece’s debt, other countries will follow with debt relief petitions and that can unfold “the box of Pandora”. These countries would be in their full rights to ask – if something is allowed for one country, why wouldn’t be allowed for the others as well? But this case of unreasonable overspending should be identified as a wrong practice and shouldn’t be encouraged with debt relief. To the contrary, it should be strongly combated – what would happen to the financial system if everyone refused to pay their debt?

Greece is currently led by a radical left party – Syriza. Their entire ideology is to appease the masses with uncontrollable spending, so reasonable budgeting is the last thing we could expect from this government. Yielding to the demands of the radical left is dangerous as it could create a precedent in European politics and encourage further overspending and wrongdoing leading to more crises. As Margaret Thatcher famously said: “The problem with socialism is that eventually you run out of other people’s money”.

Why it is not so simple

The reason Greece was bailed out in the first place is that in a currency union if one little wheel breaks, the entire mechanism is put at risk. A default by one of the Eurozone countries would threaten the future of the euro itself. In practice, that means that all the countries in the Eurozone depend on each other, as 19 alpinists attached to the same rope. 

In theory, that would give Greece indefinite leave to blackmail the rest of Europe for bailouts whenever things go wrong. But right now the economic situation of Europe is not as bad and insecure as in 2010 – it seems that the financial markets have calculated the instability in Greece and the euro is almost not falling at all, so unlike in 2010 even a Greek exit wouldn’t hurt the rest of the Eurozone economy as much. At the same time however the Athens Stock Exchange suffered an accumulated loss of roughly 30% since the start of December 2014 and Greece is not in a very good position to negotiate as the IMF suspended aid payments and the government’s exchequer is close to empty. Tsipras will be forced to negotiate as he has no other means to find money to keep his country going without bankruptcy.

The Eurozone will survive for now. But….

It seems that the only real loser in that situation would be Greece if the new leftist government keeps insisting on its demands and opts for default or Grexit. However, the entire situation clearly shows the weaknesses of the currency union and the unpleasant situations in which almost every country finds itself into. Italy, Greece and Spain complain from austerity and stagnation in their economies. Germany is universally blamed as the “bad cop” of Europe ruining other countries’ welfare. Apart from its bad reputation, Germany faces another challenge – as the most developed economy, it will always be obliged to fill the black holes and finance other countries’ bankruptcies to save the euro, thus risking the money of their taxpayers. 

All in all, the Eurozone seems to have worked out quite badly for both the rich and the “bad” economies. With the Eurozone, wealthy nations such as Germany and Finland always risk having an economic “Trojan horse” such as Greece, which will have to be bailed out and would create troubles. On the other hand, worse off economies will be dependent on the rules that their creditors mandate, which may not always be the best solution for economic revival. 

Ironically, the hostility between the North and the South reveals that the single currency that was supposed to unite Europe has only further divided it. 


Edited by: Lisa Enocsson