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Economics no image

Published on March 14th, 2012 | by Katharina Obermeier
Image © [caption id="" align="alignnone" width="562" caption="© Aster-oid"][/caption] For one of my economics exams at university, the professor handed one half of the class one version of the exam and the other half another version. He did this to reduce the risk of students cheating off one another. Of course, once the exam was over, we compared the two versions of the exam and some of my classmates were indignant because they felt their version had been more difficult. When our professor handed back our graded exams, he acknowledged the complaints. He pointed out however, that just as many students had made the same complaint about the other version, leading him to conclude that the exam was in fact fair, with the two versions being equally hard. I was recently reminded of this line of reasoning when I was reading through some comments threads for several different news articles on last week’s Greek debt swap deal, and was surprised at how polarised the debate on the situation in Greece was. Commenters were either enraged about European taxpayers’ money being wasted on profligate Greeks and their corrupt government, or infuriated at the EU and its wealthy member states practicing modern-day imperialism by imposing austerity measures on the Greek people. I could see very little ground between these two extremes. Is one of these groups right and the other therefore wrong? Or is it possible that while both groups protest that the people they champion are being treated unfairly, the Greek bail-out is in fact hard on all parties involved and therefore fair? Taken out of this specific context, either position could sound convincing. On one side of the ideological fence, the line of argument rests on the idea that citizens of some countries have worked hard, have elected governments which have strove to keep national debt under control, and have made the sacrifices necessary to keep the national budget balanced. Now, part of the money these citizens have paid to their governments for public expenditures is suddenly being funneled by an international organisation to another government, one which has not managed to control national debt, which has either spent too much or taxed too little. The citizens feel this is unjust – they feel they are being punished for someone else’s mistakes. They fear that the indebted government is too corrupt or too incompetent to use the money it is receiving wisely. They argue that it would be better for this country to default on its external debt and start over on its own. This simple narrative is embellished with various national stereotypes, a deep mistrust of the EU and a strong belief in national independence (preferably with a strong national currency). On the opposing side, the argument instead focuses on a citizenry, whose government has failed them by accumulating an unsustainable amount of debt, resulting in a contracting economy and people losing their jobs. In response to this crisis, an international organisation lends the indebted government enough money to avoid bankruptcy, but demands in return that the government cuts spending. Therefore, citizens who are already facing rising unemployment are now also left with less support from the government. They feel that this is unjust – they feel they are being punished for someone else’s mistakes. They resent the international organisation and other countries which are much wealthier than theirs imposing these conditions on them and telling their government what to do. Instead, they (or their advocates) believe richer countries should help them by fostering economic growth and creating jobs. These arguments are presented from the perspective of ordinary people in a poor country which is at the mercy of international forces that are out of its control, characterising the EU and donor governments as neo-imperialistic entities undermining Greek national autonomy. Of course, there is truth in both versions of the story: economists have discussed at length the problem of moral hazard – the possibility of creating incentives for wasteful governments or financial institutions to keep taking risks and making bad decisions by repeatedly bailing them out of trouble – so it is natural to wonder whether this applies to Greece as well. Similarly, no one can deny that the debt crisis and austerity measures are wreaking havoc on the Greek economy, with unemployment at record highs, and the question of whether there is too much emphasis on reducing debt as opposed to stimulating economic growth is a legitimate one. However, both of these narratives fail because neither is able to provide a viable alternative solution to the eurozone crisis. Commenters who argue that Greece should just be allowed to default on its external debt fail to realise how interconnected modern economies are. Governments all over the world are worried about the impact a Greek default would have on their economies, and undoubtedly European countries currently financing the bail-out would suffer most, as international financial markets would lose all faith in EU member states’ ability to keep the crisis at bay. As for the other side’s vision of unconditional funds flowing into Greece to finance job creation, it ignores the issue of moral hazard, and, more importantly, does not take into account that economic growth will be virtually impossible to achieve without restored investor confidence in the country, which in turn requires significant debt reduction and restructuring. The eurozone debt crisis has been hard on all parties involved (including private investors, who have taken losses of up to 74%). The EU’s current attempts to overcome it have brought additional costs to certain groups, who are understandably upset about this. But in the end, it is important to realise that there are no panaceas or easy solutions. However flawed and painful the bail-out may be, it is still better than the alternatives.

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Profligate Greeks versus Neo-Imperialists: The Polarised Debate on the Greek Bail-out

© Aster-oid

For one of my economics exams at university, the professor handed one half of the class one version of the exam and the other half another version. He did this to reduce the risk of students cheating off one another. Of course, once the exam was over, we compared the two versions of the exam and some of my classmates were indignant because they felt their version had been more difficult. When our professor handed back our graded exams, he acknowledged the complaints. He pointed out however, that just as many students had made the same complaint about the other version, leading him to conclude that the exam was in fact fair, with the two versions being equally hard.

I was recently reminded of this line of reasoning when I was reading through some comments threads for several different news articles on last week’s Greek debt swap deal, and was surprised at how polarised the debate on the situation in Greece was. Commenters were either enraged about European taxpayers’ money being wasted on profligate Greeks and their corrupt government, or infuriated at the EU and its wealthy member states practicing modern-day imperialism by imposing austerity measures on the Greek people. I could see very little ground between these two extremes. Is one of these groups right and the other therefore wrong? Or is it possible that while both groups protest that the people they champion are being treated unfairly, the Greek bail-out is in fact hard on all parties involved and therefore fair?

Taken out of this specific context, either position could sound convincing. On one side of the ideological fence, the line of argument rests on the idea that citizens of some countries have worked hard, have elected governments which have strove to keep national debt under control, and have made the sacrifices necessary to keep the national budget balanced. Now, part of the money these citizens have paid to their governments for public expenditures is suddenly being funneled by an international organisation to another government, one which has not managed to control national debt, which has either spent too much or taxed too little. The citizens feel this is unjust – they feel they are being punished for someone else’s mistakes. They fear that the indebted government is too corrupt or too incompetent to use the money it is receiving wisely. They argue that it would be better for this country to default on its external debt and start over on its own. This simple narrative is embellished with various national stereotypes, a deep mistrust of the EU and a strong belief in national independence (preferably with a strong national currency).

On the opposing side, the argument instead focuses on a citizenry, whose government has failed them by accumulating an unsustainable amount of debt, resulting in a contracting economy and people losing their jobs. In response to this crisis, an international organisation lends the indebted government enough money to avoid bankruptcy, but demands in return that the government cuts spending. Therefore, citizens who are already facing rising unemployment are now also left with less support from the government. They feel that this is unjust – they feel they are being punished for someone else’s mistakes. They resent the international organisation and other countries which are much wealthier than theirs imposing these conditions on them and telling their government what to do. Instead, they (or their advocates) believe richer countries should help them by fostering economic growth and creating jobs. These arguments are presented from the perspective of ordinary people in a poor country which is at the mercy of international forces that are out of its control, characterising the EU and donor governments as neo-imperialistic entities undermining Greek national autonomy.

Of course, there is truth in both versions of the story: economists have discussed at length the problem of moral hazard – the possibility of creating incentives for wasteful governments or financial institutions to keep taking risks and making bad decisions by repeatedly bailing them out of trouble – so it is natural to wonder whether this applies to Greece as well. Similarly, no one can deny that the debt crisis and austerity measures are wreaking havoc on the Greek economy, with unemployment at record highs, and the question of whether there is too much emphasis on reducing debt as opposed to stimulating economic growth is a legitimate one. However, both of these narratives fail because neither is able to provide a viable alternative solution to the eurozone crisis. Commenters who argue that Greece should just be allowed to default on its external debt fail to realise how interconnected modern economies are. Governments all over the world are worried about the impact a Greek default would have on their economies, and undoubtedly European countries currently financing the bail-out would suffer most, as international financial markets would lose all faith in EU member states’ ability to keep the crisis at bay. As for the other side’s vision of unconditional funds flowing into Greece to finance job creation, it ignores the issue of moral hazard, and, more importantly, does not take into account that economic growth will be virtually impossible to achieve without restored investor confidence in the country, which in turn requires significant debt reduction and restructuring.

The eurozone debt crisis has been hard on all parties involved (including private investors, who have taken losses of up to 74%). The EU’s current attempts to overcome it have brought additional costs to certain groups, who are understandably upset about this. But in the end, it is important to realise that there are no panaceas or easy solutions. However flawed and painful the bail-out may be, it is still better than the alternatives.

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About the Author

Katharina Obermeier

Katharina considers herself a German-Canadian hybrid. She grew up in Germany and completed her BA in International Relations at the University of British Columbia in Vancouver, Canada. Politics, especially in relation to concepts of nationality, have always fascinated her, and she is particularly interested in international political economy. During her studies, she was an avid participant at Model United Nations conferences, and helped welcome international exchange students to her university. She is currently completing an internship at a Brussels-based trade association and hopes to work in European affairs in the future. In her political writing, Katharina marries social democratic principles with a keen interest in the European Union and its implications for European politics and identity. She writes to counteract simplistic ideas about politics and economics, continuously attempting to expose the nuances and complexities involved in these subjects.



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