Paul de Grauwe: "EU finance ministers should start facing the reality"

Paul de Grauwe

Paul de Grauwe warned five months ago, before Syriza won the elections on 25 January 2005, in an article "Debt relief is necessary to avoid a crisis in the Eurozone", that EU finance ministers lived in a cocoon, "failing to take into account the political and social implications of the intense austerity programmes they imposed in countries like Greece (but also in other countries of the periphery)."

Here are the last six paragraphs of Paul de Grauwe's article of 11 January 2015 :

"It is appalling to see that the European political elite has been living in a cocoon, failing to take into account the political and social implications of the intense austerity programmes they imposed in countries like Greece (but also in other countries of the periphery). This political elite still has not learned the lessons. The first reaction of the German minister of finance after the announcement of new elections in Greece was that the discipline needed to be continued rigorously.
What is to be done? Much will depend on the election results in Greece. The far-left party, Syriza, seeks to weaken the intensity of the austerity programmes and to negotiate a debt restructuring with the European authorities.
It is quite surprising to find out that these demands, in fact, are based on a correct analysis of the Greek problem. Despite the austerity, that has been extraordinarily intense, the Greek public debt has increased and now exceeds 170 per cent of GDP. The burden of this debt is so high that future Greek governments will not be able to continue to service it.
Instead of denying this reality the EU finance ministers should start facing it. They should begin to think about how they can ease the debt burden of Greece. Denying this reality condemns Greece to many more years of misery and will encourage extremist political movements in the country even further.
The risk today is that the political leaders of the Eurozone refuse to relieve the Greek debt (and that of other countries of the periphery). In that case, a fundamental crisis in the Eurozone is inevitable. Even if Syriza does not make it at the coming election, extremist parties will gain the upper hand in future elections. This will be very disruptive for the Eurozone as a whole.
History teaches us that after a debt crisis a balance must be found between the interests of creditors and debtors. The unilateral approach that has been taken in the Eurozone in which the debtors have been forced to bear the full weight of the adjustment almost always leads to a revolt of these debtors. That is now underway in Greece. It can only be stopped if creditors dare to face this reality."