What The Eurogroup Demands Is Absurd

by Paul Krugman on 19 February 2015

Paul Krugman was interviewed by Evan Davis on the BBC’s Newsnight programme on 17th February. The following is a transcript of the part of the interview dealing with the negotiations for a new deal for Greece.

I don’t know what you think but how far should the Eurozone go, the European Commission, in helping yield to what Syriza is asking for?

The important thing to realize is that Syriza is actually not asking for an inflow of money, it’s not asking for aid. There’s no question that Greece is going to be net transferring money to its creditors. What’s happening right now is that the Eurogroup is demanding that Greece commit to, or recommit to, increasing, to tripling the amount that it’s paying; it’s the primary budget surplus that we are actually talking about. So they are demanding that Greece go ahead with a program that calls for a major further increase in austerity despite the fact that Greece is suffering a Great Depression level slump.

That’s not gonna happen. Let’s put it this way: it is an absurd demand. Maybe this Greek government might agree to it; if so they will fall and something much more radical will take its place. So the question is whether the Eurogroup is so determined to make an example of Greece that they are willing to see that happen. It’s very frustrating to see Syriza portrayed as asking for easy terms, asking for a lot of money. They are actually prepared to continue with the enormous sacrifices Greece has already made. What they are not willing to do is to substantially increase those sacrifices going forwards.

There is one criticism people make of Syriza though, which is that you have to say that Greece’s problems are not entirely imposed on it from overseas. There were some problems, structural problems, in the Greek economy before all this started. By essentially turning a back on reform of the Greek economy, they are not giving what gives hope to the rest of Europe that Greece will turn itself around and be a flourishing economy in 20 or 30 years time.

I think that, let’s be serious here, some of the reforms that Europe is trying to get in Greece are a good thing, some of them are more dubious. All of that is going to be very long in the payoff. Meanwhile we are now, remember we’re almost five years into this, we’ve had five years of Europe saying to Greece “do this, suffer this, make these cuts and you will see your economy turned around”. The Greek electorate is not going to stand for this. If Europe isn’t about democracy, what’s it about?

What’s your theory as to why Europe, both the Germans and also the non-Germans – the Spanish, the French – what’s your theory as to why they are playing such hardball game with Greece?

Well for some of them, actually you want to think about it in terms of the various governments. Other European countries, first of all the Germans, they’ve been telling their electorate that it’s all about lazy, irresponsible southern Europeans. And they’ve never really leveled with them about the fact that yes, there was a lot of bad behavior in Greece but, you know, this is a shared European problem. In the case of a government like that in Spain, which has been dutifully imposing a lot of austerity, how can they turn to their voters and say “well, you know the Greeks are right we really shouldn’t be doing this. We shouldn’t be sacrificing quite as much”. So there is a real issue. I talked to some Irish economists. They are pointing out that the government in Ireland is really acting against the interests of the people of Ireland but in its own interests by saying “all look we’re good. We’re good on austerity, we’re good on reform, so therefore the Greeks should do it as well”. So lot’s of political incentives to continue.

Would Greece be better off leaving the Euro? I mean this could be one outcome of all of this. And we know some people in Syriza actually want to leave the Euro.

Well, Greece would be better if it had never joined but unfortunately that’s not an option. The trouble with all of this is that the process of a divorce from the Euro would be incredibly messy and costly. It’s not something anyone wants to do lightly. And the consequences, by the way, for the rest of Europe, once the Euro becomes clearly a not necessarily permanent arrangement, that’s a really bad thing. So this is not where you want to go but it is not inconceivable. And if the demands are unacceptable, if Greece is told that, in effect, it must give large-scale reparations to creditors forever, then Euro exit will become a realistic possibility.

http://www.socialeurope.eu/2015/02/eurogroup/