Why is Europe indebted to Greece ?

And yet things didn't start out so bad. Who wouldn't be impressed by a Finance Minister, cool as a cucumber and a smile on his lips, strutting up to each of his European counterparts seeking support when he knows full well they’re dead set against giving it to him? By announcing that Greek government debt would no longer be accepted as collateral for its regular refinancing operations, the European Central Bank brought this observation round to a quick and decisive end. Throwing its two cents in, Standard and Poor's downgraded Greece's already super-low rating by another notch. As the proper student of Game Theory he is, Yanis Varoufakis had probably anticipated these moves. What is certain, in any event, is that the much-expected tug-of-war between Brussels and Athens is well under way. Worse: the ECB's decision means that a solution will have to be reached fast. Greek banks are reliant on Emergency Liquidity Assistance provided by their central bank, which is now the only institution that can give them the additional cash they might need. If, as stated in the media, this assistance is limited to €65 billion, things could quickly come to a head. With tension rising, Greek banks could see their borrowing capacity on the money market dry up at the very moment deposit withdrawals accelerate. And didn't Germany's credit position in the Target system increase by €50 billion in January alone, at least in part stemming from - as the Professor Sinn has already pointed out - the Greek deposit flight? Making the situation even more critical is the fact that tax revenues have fallen and within a few weeks, the government may find itself unable to pay not only its creditors but also its civil servants.

The next few days will tell if a compromise can be reached. This is obviously in Greece's best interest: the return of the drachma would be a dramatic adventure and no one can say how the country's already beleaguered population would handle it. Things are less clear for its European partners. Some think the euro countries are now insulated from contagion risk by all the mechanisms implemented since 2012. And for many, giving in to Greece's demands would dissuade those who have made the necessary efforts from continuing them. The way they see it, renegotiating Greece's commitments, as the Tsipras administrations wants, is unjustified and dangerous especially since the Greek economy is not "crushed by the weight of public debt." Yes, government debt is heavy, but it is stretched out over a very long term and for the most part the interest rates are very low... All of these arguments need to be discussed. Stopping there would be omitting a key factor, however: right now Europe has a debt toward Greece. It's true that the country has not completed the reforms undertaken, but it has done enough to experience the harshest recession seen in a developed country since World War II. Of course, at least part of the blame can be squarely placed on the weakness of the Greek government machinery. Still, this weakness has long been a factor and little has been done to fix it. Five years after the crisis began, and this is the result. While it's true that Greece has at least temporarily rebalanced its budget and foreign accounts, and wages have dropped back to pre-Olympics levels, can we really say that the Greek economy is more competitive as a result? Doubtful at best. In just a few short years, capital expenditures by businesses have literally collapsed to barely one-third what they were in 2007! What's more, a chunk of the country's skilled labour has pulled up stakes. European governments have their share of blame in this failure - just enough to give the new administration time to show it is capable of doing better than its predecessors.

Anton Brender
Chief Economist