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Debt relief for Greece is necessary to avoid a crisis in the Eurozone

De Grauwe, Ρ. (2015) “Debt relief for Greece is necessary to avoid a crisis in the Eurozone“, LSE EUROPP, 12 Ιανουαρίου.


On 25 January Greece will hold parliamentary elections. The elections have generated uncertainty in the Eurozone given the potential for the radical left party Syriza, which has called for a renegotiation of the country’s bailout conditions, to emerge as the largest party. Paul De Grauwe writes that even if Syriza fails to win power in the upcoming elections, the debt problem in Greece will ultimately require a balance to be found between the interests of creditors and debtors. Unless the political leaders of the Eurozone accept some form of debt relief for the country (and for other countries in the Eurozone periphery) a crisis will be inevitable in the long run.

The Greek debt crisis that erupted in 2010 is back, and again threatens the stability of the Eurozone. That crisis was the result of two factors. First, an unbridled spending drift of both the private and the public sectors in Greece during the boom years of 2000-2010, which led to unsustainable large levels of debt. Second, reckless lending to Greece by Northern Eurozone banks. At no time the Northern bankers asked themselves the question of whether the Greeks would repay the loans.

The European Union chose to resolve the debt crisis by punishing the Greeks and by saving the Northern banks. A punitive austerity programme was imposed on Greece, whose effects are now visible everywhere in this country. A decline in GDP of close to 25 per cent since 2010, a rise in unemployment to a level we have not seen since the 1930s, and impoverishment of large parts of the Greek population.

The banks went largely unpunished. True there was a debt restructuring of the Greek debt held by private investors. Some banks paid the price of excessive credit granted to Greece, but most banks escaped this fate by dumping their Greek claims onto the public sector. Those claims are now in the hands of national governments and the European Central Bank. And these want to have their money back whatever the consequences may be for the Greek people and the Greek political system.


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