New Democracy Party’s landslide victory in last Sunday’s Greek election brings full circle the deplorable saga of that country’s debt crisis. After the European Union inflicted devastating economic punishment on the Greek people, humiliated the leading Greek party with no involvement in triggering the crisis, and made Greek fascism politically viable, its austerity program restored to power the corrupt, dynastic party whose irresponsibility caused the calamity in the first place. And to demonstrate the futility of this all, New Democracy regained power on a platform of fiscal irresponsibility and with a leader from one of Greece’s entrenched political families.
Europe, the U.S., and other advanced democracies must learn from the Greek fiasco to avoid repeating it with even more disastrous results.
Several countries on the periphery of Europe faced serious financial crises and skyrocketing borrowing costs in the Great Recession. Most had done nothing wrong. Spain, for example, suffered from the collapse of an enormous housing bubble inflated by irresponsible lending from northern European banks. EU free commerce rules prevented national governments from blocking irresponsible foreign lending.
Greece alone among the peripheral countries actually bore significant blame for its problems. The pre-crisis New Democracy government raised spending and shrank tax revenues to stimulate the economy and maintain its popularity while concealing its deficit from voters and the EU.
When the recession hit, and a new Socialist government exposed New Democracy’s cooked books, investors fled. The Greek government could not rollover its debt and risked default. Greek banks, which held large amounts of government debt, became precarious. German and French banks also had invested so heavily in Greece that their stability was in jeopardy. The Greek government and banks were so closely intertwined that a default by one could bring down the other.
The sensible solution at this point would have been to compel foreign banks to write off large parts of their Greek investments. The banks knew the risks when they made their loans and presumably priced that into the interest they charged. The European Central Bank stoutly resisted this, fearing for the stability of these imprudent banks.
Instead, the EU and other international financial institutions offered what has widely been described as a “bail-out.” This was not, for the most part, money to support human services or other forms of consumption. Instead, this was money for Greece to send right back to its external creditors. In essence, the international institutions were bailing out their own irresponsible banks but laundering the money through the Greek government.
As a price for this “bail-out,” the EU and its partners demanded crippling austerity: tax increases, widespread lay-offs of public employees, and massive cuts in pensions and other social supports. Laying off so many workers and pauperizing pensioners sharply reduced demand, which triggered further lay-offs and wage cuts in the private sector. As the depression deepened, unemployment topped 25 percent. When austerity devastated the Socialists’ working-class constituency, the party was effectively destroyed.
As powerful as the EU is, however, it was unable to rewrite the basic rules of economics. Each round of austerity further depressed the economy, reducing revenues and increasing Greece’s deficit. Even from the creditors’ perspective, austerity was self-defeating.
Rather than recognizing the error of their ways, the international organizations doubled down on austerity, demanding still deeper cuts to government employment and basic public services. The hypocrisy was rich: Greece’s deficit was growing precisely because it was complying with the EU's austerity plan, whose implementation predictably misfired.
With their economy in free-fall and the EU showing no inclination to reduce the pressure, Greek voters turned to anti-austerity parties. On the right, this elevated the neo-fascist, swastika-flashing Golden Dawn, whose leaders faced charges for killing political opponents. The majority, however, went to Syriza, a leftist group that pledged to stare down the EU and end austerity.
The EU, however, stonewalled, forcing Syriza to choose between taking Greece out of the EU and implementing further rounds of crushing austerity. Syriza blinked in this stare-down, fracturing its membership and earning the ire of its voters. Since then, it has been governing in fragile coalitions with small conservative parties, largely abandoning the aspirational program it ran on.
Eventually, the International Monetary Fund pressured the EU to relent on austerity. But by then, the Greek economy had shrunk by more than a quarter, numerous Greek families had horror stories of losing their homes, being unable to support themselves, or lacking medical care for treatable conditions, and Syriza had been thoroughly discredited with Greek voters.
Over the past year, the EU formally ended its intervention into Greece’s affairs. Perhaps the EU imagined that this monstrous punishment would chasten Greek voters and cause them to favor parties that will ensure nothing like this happens again.
Instead, voters drew just the opposite conclusion, punishing the parties that implemented austerity and listening again to the siren song of prosperity from New Democracy. Its leader rode to victory with proposals for tax cuts and economic stimulus, 90 percent of which he admits are inconsistent with Greece’s commitments to fiscal responsibility. He also adopted fierce anti-immigrant and nationalist positions to woo votes from the neo-fascist party. But millions of desperate Greeks, whom the EU has put through misery for economic misdeeds they were and are ill-equipped to monitor, voted for anything that might help make up some of the economic ground lost over more than a decade.
A worse outcome is difficult to imagine. The French and German banks whose reckless investments helped spark the crisis eventually lost some of their investments, but whether it was enough to deter similar irresponsibility in the future remains to be seen. The parties that responded to calls for patriotism and showed commitment to the European ideal were discredited. And the party most responsible for the crisis was able to bide its time and escape responsibility.
Through multilateral institutions, the U.S. often faces similar questions about how to treat countries in economic crisis. Greece demonstrates that collective punishment is morally wrong and likely to be self-defeating.
NOTE: This post has been updated from the original to correct an editing error — Greece’s deficit grew precisely because it was complying with the EU's austerity plan.
David A. Super is a professor of law at Georgetown Law. He also served for several years as the general counsel for the Center on Budget and Policy Priorities.