Europe Must Learn From the Greek Tragedy (Mervyn King, Bloomberg)
Last Modified: 09:01 PM, Wed Jul 10, 2019

Mervyn King

Bloomberg. 11 July 2019

Word Count: 1125

This is for Research purpose only

(Bloomberg Opinion) -- Democracy, it is often said, began in Greece — but lately Athens has been struggling to make its invention work well. At elections last Sunday, voters ejected the left-leaning Syriza government led by Alexis Tsipras and turned to Kyriakos Mitsotakis and his conservative New Democracy. Unfortunately, further disappointment seems all too likely. The new leader inherits problems that will be extremely difficult to solve — and that raise questions for Europe as a whole.

Despite an extraordinary depression, during which GDP fell by a quarter and real incomes by much more, growth remains sluggish — too slow to do much about an unemployment rate of 18% and a debt-to-GDP ratio of more than 180%. Coping with such a severe economic setback is difficult enough; requesting patience during a persistently weak recovery might be even harder. The new government’s biggest challenge will be to persuade the country’s voters that New Democracy will live up to its name and attend to their concerns. Given the background, this can hardly be taken for granted.

Parliamentary elections are not the only expression of popular opinion. At regular intervals, the various peoples of the European Union have been asked in referendums to support the next steps toward “ever-closer union.” Time and again, voters have demurred; time and again, the EU has plowed on regardless. This happened in Denmark, France, Ireland and the Netherlands — but one of the most striking examples of seeking, then ignoring, voters’ opinions was in Greece. In 2015 voters were asked whether the bailout conditions imposed by the so-called troika of the European Commission, the European Central Bank and the International Monetary Fund were acceptable.

The voters said no, and they said it emphatically: 61% voted in favor of the Syriza government’s recommendation to reject the conditions. Within 24 hours, Tsipras held talks with parties that had supported a yes vote, and acceded to the troika’s demands. At this turn of events, Yanis Varoufakis resigned as finance minister, saying: “Tonight we had the curious phenomenon of a government overthrowing its people.” A week later, the Greek government accepted a bailout package that required even larger pension cuts and tax increases than the plan the voters had just rejected.

Varoufakis’s highly critical account of all this deals with events that took place after I had stepped down as governor of the Bank of England — but allow me to say it rings true. The refusal to recognize that Greece’s debt was unsustainable, and the failure of the IMF and others to make this public, imposed a degree of austerity that caused a slump even worse than the Great Depression in the United States in the 1930s.

The end of the Greek tragedy is not yet in sight. Nonperforming loans of Greek banks have fallen in recent years, but the decline in the economy has meant that the share of nonperforming loans in the total is still staggeringly high, at over 40%. Greece’s population has fallen since the crisis erupted in late 2009, largely through the emigration of many of its most talented young people. In this way and others, Greece’s long-term prospects are seriously impaired.

It was a mistake to believe that it was possible to remain in the euro while restructuring the national debt. Although debt restructuring was, and is, necessary, it would not have been enough: A return to full employment would have led to another large current-account deficit with no means of financing it. Greece joined the euro at a significantly overvalued real exchange rate. A large depreciation was necessary to boost external demand and offset the inevitable reduction in domestic demand as structural reforms were put in place. Yet the troika, and especially the ECB, was determined to hold the euro together.

The troika had already imposed tough conditionality on other countries, and it would have been impossible to maintain those policies had Greece been given a way out in the form of debt relief. The European authorities didn’t mince their words in private letters to prime ministers in several countries in trouble. So the EU and the IMF, through the troika, imposed an unnecessary and excessively painful degree of austerity.

Was there any alternative? Yes. At any point between 2010 and 2015, Germany and Greece could have jointly decided to let Greece leave the euro area, with the promise that it could one day return. Varoufakis implies that Germany’s finance minister, Wolfgang Schaeuble, would have helped to implement such a solution, and I agree. But German Chancellor Angela Merkel and the ECB preferred to muddle through. Fine for them, but not for Greece. The long line of political leaders sacrificed on the altar of the euro now includes Tsipras as well as Varoufakis.

The underlying problem isn’t confined to Greece. No monetary union has ever survived without evolving into a political union. The issue for the EU is that there’s little popular support for this. So the EU — its leaders and its institutions alike — have sought political union by stealth, by means of an “administrative state.” This is a remarkable gamble, and even if it succeeds, it will impose enormous costs on its southern members.

Populism is on the rise throughout the West, but the causes differ. In much of Europe, surging populism reflects the consequences of economic austerity amid the struggle to keep the euro alive. (Further ahead, resistance in Germany to a European fiscal union will be the crucial factor in deciding the fate of the euro.) In the United States, populism arises from the stagnation of real wages over a quarter of a century or more and declining life expectancy. In Britain, it springs from the failure of the main political parties to be honest about the consequences of EU membership and, more recently, from their reluctance to honor the result of the 2016 referendum. In all cases, though, it reflects a deep mistrust among the majority of citizens of the motives and actions of a political elite.

None of this is new. E.R. Dodds, the Oxford classical scholar, said of the Archaic Greek world: “Whole classes were ruined by the great economic crisis of the seventh century, and this in turn was followed by the great political conflicts of the sixth, which translated the economic crisis into terms of murderous class warfare.” Now, as then, political elites have been slow to see that their lack of understanding has fueled disappointment, disenchantment and turmoil.

Across Europe, a European identity remains popular – but the EU and its administrative state are not. As Greece’s difficulties drag on, and Europe’s politics turns ever more febrile, the union’s leaders need to ask themselves a fundamental question: What is the point of democracy if the views of voters are ignored?

To contact the author of this story: Mervyn King at

To contact the editor responsible for this story: Clive Crook at

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mervyn King is a Bloomberg Opinion columnist. He is a member of the U.K. House of Lords, and a professor of economics and law at New York University. He was governor of the Bank of England from 2003 to 2013.

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