Greece's Crazy Leftists Have a Good Idea

172 JAN 27, 2015 12:01 AM EST

By The Editors

 Bloomberg

Amid the populist rhetoric that propelled the far-left Syriza party to victory in Greece's parliamentary elections, there's one idea that Germany in particular should take to heart: revive growth in the euro area by giving the hardest-hit countries a break on their debts.

Syriza leader Alexis Tsipras, who was sworn in Monday as Greece's new prime minister, has long been calling for a "European debt conference" -- a summit meeting at which the region's leaders would reduce the debilitating obligations of Greece and other financially troubled euro-area governments. Unlike the rest of the party's program, this idea makes sense.

Greece has already been granted some debt relief, but not enough to make its fiscal position sustainable. Tsipras is calling for a writedown of about one-third.

There's plenty of historical precedent for relief on this scale. One case in particular ought to resonate with German officials, who are among the most steadfast opponents of debt relief. After World War 2, Germany's creditors recognized that full payment of the country's debts would make revival harder and could destabilize the whole of Europe. In 1953, they agreed to forgive about 50 percent of West Germany's debts, and made the rest contingent on economic performance. The creditor countries acknowledged at the time that the debt relief was in their own interests.

Today, Germany is the most powerful creditor nation in the euro area. A prolonged financial and economic crisis -- together with fiscal and regulatory mismanagement on all sides -- has left Greece and others in financial distress. Concerned that further debt relief would encourage profligacy, Germany opposes writedowns and insists on severe fiscal austerity. The results have been disastrous. In Greece, one in four workers is unemployed and -- by one estimate -- almost half the population is now in poverty.

This enforced hardship isn't improving the countries' ability to pay their debts or helping the European Union's economic prospects. Slow growth has eroded the fiscal benefits of austerity. Despite spending cuts and tax increases, Greece, Italy, Portugal, Spain and even France will be unable to get their ratios of debt to gross domestic product down to the euro area's permitted maximum of 60 percent in the foreseeable future.

Debt forgiveness tied to pro-growth economic reforms would help. In some countries, the cost of servicing debt exceeds 10 percent of government expenditures. Some of this money would be better used for spending that would put people back to work. Higher employment and faster growth would make it easier for governments to pay their remaining obligations. That's why, in circumstances as dire as these, the true cost of debt relief to creditors is low, at worst, and in some cases could even be negative.

There'd be other benefits too -- above all, easing the suffering already inflicted on Greece and others, and restoring popular support for the European project. As a principal stakeholder in that project, Germany stands to gain a lot. Its refusal to countenance further debt relief is economically damaging and politically dangerous. For its own sake, Germany should think again.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.