#PolicyBlog Forget Grexit*!?


One of the super powers that economists believe they have is the ability to predict the future. The question whether there will be a Grexit or not is therefore a hot topic at the moment. Let us begin by stating the obvious:

  1. Greece has to repay 1.5 billion euros to the IMF by June 30th, which they seemingly cannot pay. Their European bailout package also expires on the same day.
  2. A deal, although practically feasible, will be hard to strike due to sour feelings between Angela Merkel, Germany’s Chancellor, and Mr. Tsipras, the Greek Prime Minister – the two people seemingly heading the negotiations.
  3. The costs of Grexit are still higher than the benefits (see a more detailed explanation here).
  4. The latest Eurozone finance ministers’ meeting has ended with no deal for Greece!

However, instead of taking the predictable route of weighing the pros against the cons, and identifying all the possible paths that these negotiations might take, ECON+ would like to highlight a completely different perspective on the situation.

Everyone will probably agree that the conventional wisdom follows that high national debt hinders growth, which has led all politicians to believe that they should balance their governments’ books. Another fact that most agree on is that generally creditors are more powerful than borrowers – e.g. the IMF and Germany has more say than Greece on most global issues. Can we not then understand that these debt relations of power affect loan conditions and ultimately economic outcomes? Especially if we agree that game theory techniques has helped economists to better understand the dynamics of decision making – e.g. full information is not assumed. When the creditor has all the power writing debt off is inconceivable, because creditors have the ability to enforce conditions – e.g. banks have the power to take away a debtor’s home and the IMF can enforce austerity on Greece. Moreover, we must realise that modern money is just a circulation of IOUs. Governments create money by borrowing from banks, and banks issue IOUs. If there were no national debt, governments would not have to borrow from banks, and banks would have to create all the money themselves through private loans, but there simply are not enough private borrowers to make that feasible. Thus, the money supply would collapse if governments did not borrow.

How does this help us then to better understand the Greece issue and as a result find a more effective solution? Well, if we generally agree with the above facts, the retaliation of the Greeks is a sign that there is a break against the modern idea that there should be no institutions of debt forgiveness (of the kind we saw in the ancient and medieval world). In fact, since the 1980s we have seen no real institutions to protect debtors, but the very opposite. A planetary administrative system, operating through the IMF and World Bank, corporations and other financial institutions, was set up primarily to serve and protect the interests of creditors. If we were to accept that institutions protecting debtors and at times forgiving debts should be reinstituted, then a large amount of resources would be freed up to bring about much needed and desired economic development.

To sum up, perhaps it is worth imagining a world where powerful creditors do not set the rules of the game. For example, it was made quite clear during the bailouts after the 2008 crisis that some people (the powerful financial institutions) do not have to pay back their debts, yet others always do (the weak homeowners and less influential countries). If you think this is crazy, ECON+ recommends listening to this 10 part podcast on the History of Debt by anthropologist David Graeber (the last episode deals with the current times as discussed in this article).

*The exit of Greece from the European Union (EU).

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