In the two developed-world economies that suffered the most during the 2008 financial crisis and the ensuing recession, the central banks are at last declaring victory. The Federal Reserve has raised interest rates three times in the past seven months and has telegraphed its intention to start shrinking its massive balance sheet this year. Federal Reserve Chair Janet Yellen remarked in June that another financial crisis was unlikely “in our lifetime.” And the European Central Bank, confronting rising interest rates and a continuing economic expansion, is hinting that it may start to taper its asset purchases and will begin to consider raising interest rates, moves that suggest it thinks the eurozone’s economy can now function just fine with less of its help.
After failing miserably to forecast the severity of the global recession of 2009, central bankers are recovering some of their self-esteem. Looking back on the past decade, they succeeded in averting a total crash, setting the stage for a recovery, and sustaining the type of long expansion that generates jobs and, it is still hoped, income growth. While the economies of Europe and the U.S. are not quite firing on all cylinders, there is now a sense that they are chugging along just fine.
And then there’s Greece. While I was in Athens last week, the oppressive heat—107 at midday—felt like a metaphor for the heavy air of resignation and stagnation that blanketed the city. Garbage was piling up in the streets off Syntagma Square thanks to a strike by sanitation workers. We hastened to tour the Acropolis because we wanted to get there ahead of a strike by security guards that would shut down the site in the cool morning hours.
I know it’s the worst kind of reporting to drop in for a couple of days and make grand statements. (In the Financial Times, Simon Kuper’s latest Greece dispatch pulls it off quite nicely.) But there’s also the data, which speaks to a continuing financial and human crisis on a scale unimaginable in developed countries. Ten years after the onset of the crisis, Greece, which has a population of 11 million—roughly equivalent to that of Ohio—is far worse off than any U.S. state or European country was at their depths. The unemployment rate in April was 21.7 percent. The country has seen its population shrink for six straight years. The country’s total output has shrunk about 25 percent from its 2008 peak. GDP per capita is on par with Hungary and Latvia. And this is eight years into an expansion.
Growth cures a host of social, political, and economic ills, while stagnation exacerbates them. The best way to work your way out from under a massive pile of debt is to have a little inflation and some growth. But Greece, with its monetary fate tied to Europe (and hence to Germany), has had virtually no inflation and no growth whatsoever. If your debt is 100 percent of GDP and you hold it steady while the economy shrinks 25 percent, then your debt rises to 133 percent of GDP. That’s effectively what has happened to Greece, whose debt now stands at an astounding 177 percent of GDP.
Of course, Greece got itself into its debt trouble, and its political system has been generally ineffective at restructuring the country’s economy and reigniting growth. But they’ve lacked the most powerful tool a a struggling country has at its disposal—a central bank that will set accommodative policies.
And the technocrats at the European Central Bank haven’t done the country any favors. Greece continues to labor under the absurd austerity terms set by its creditors. Usually, when you foolishly lend money to entities that can’t pay it back, your lenders accept that they won’t get 100 cents on the dollar and write down a portion of the debt as part of a restructuring. The entities that have come to Greece’s rescue—the troika of the European Central Bank, the International Monetary Fund, and the World Bank—have refused to countenance serious write-downs. (Largely for fear of how doing so would affect the health of the German banks that binged on Greek debt.) And so the country is required to run a primary surplus of 3.5 percent of GDP so that it generate sufficient interest payments to service its debt load. That would be like the U.S. running a $570 billion surplus every year.
Rather than pat themselves on the back for engineering growth and banishing financial crises forever, it would be nice if the world’s most powerful central bankers would acknowledge the continuing financial crisis in their midst. And then they could start arguing for a real resolution of the problem. The ECB (and the Fed) have spent enough resources and extended enough aid to the world’s banking system. It’s time to give Greece a break.