David Davis writes for Conservative Home about the need for debt restructuring in the Greek Crisis


As published on Conservative Home:
For the Marshall Plan, read the Cameron plan. The Prime Minister’s opportunity to save Greece – and lead in Europe

The Greek people have spoken. Despite the vague nature of the question put to them, their response has been crystal clear. 61 per cent voted against the settlement put forward by their European creditors. Greece has refused to kneel to political and financial bullying.

The scale of the vote against Europe is extraordinary, given the history surrounding Greece’s relationship with it. For Greece, the EU and the Euro is seen as a break from the troubles of the past. Membership of the EU followed the end of the military rule of the Colonels during the 1960s and 70s. Membership of the Euro is considered to be a symbol of democracy and modernity in Greece.

Approval of EU leadership in Greece was 60 per cent in 2009, even with the economy in freefall. Since then approval has plummeted, culminating in Sunday’s referendum. Membership of Europe was important to Greece in a manner that can never be understood in Britain, with our long history of democracy, rule of law, and global enterprise. The No vote marks a paradigm shift in perceptions of the EU.

Whatever happens, Greece’s No vote must not be allowed to result in an impasse. The Greek banking system is on the verge of collapse. If it is left to disaster, the consequences will be dramatic and far-reaching.

For Greeks, the consequences could be catastrophic. The conditions that have been witnessed this week after banks closed and strict withdrawal limits were imposed will become permanent. The payments system has been frozen, making it impossible for Greece to import vital food and fuel. The economy is grinding to a halt.

For the rest of Europe, there is still a serious risk to the banking system. Greek contagion will spread, and we cannot rely on the European regulators to be prepared. They have proven themselves to be spectacularly complacent up to this point. Twenty-four European banks failed stress tests of their finances last year, and even those tests were considered to be insufficiently thorough.

With so many European banks still weakened from the last financial crisis it is probable that the problem will spread. And when it does, the economic ripples will likely tip Europe back into recession.
So it is time for boldness. Europe now needs an imaginative and decisive set of ideas to resolve the greatest challenge the EU has faced in modern times.

What David Cameron needs to do today is find a way of slicing through the European Gordian knot. This starts with a proper recognition of the realities, in a way that German domestic politics is preventing at the moment. The first point is to recognise the failure of what has been done so far.
If price competition alone was enough, the Greek economy would be going gangbusters by now. Wages have fallen by 22 per cent since 2010, and nearer to 40 per cent in the critical tourism sector. But this is not enough. The economy has shrunk by a quarter and unemployment has soared. Despite endless austerity and ferocious financial measures public debt is now around 175 per cent of Greek GDP.

As for the famously profligate Greek public sector, most of the money borrowed from international institutions in the last few years has been spent in paying off international private sector debts and restructuring the fragile Greek financial sector – both actions of more value to protecting the European financial system than to protecting the Greek people. The last two years governmental operating deficit of €21.5 billion has been in order to cover the €22 billion of historic interest costs.

Without its historic financial burdens, Greece is close to a primary operating surplus. But it has no chance whatsoever of meeting its debt costs as they now stand. Unless Greece gets protection from its debts and a route back to economic growth, the misery for its people and the risk to the European financial system will go on and on and on.

What Greece needs is a modern equivalent of the Marshall Plan. Apart from the well known (but relatively small) pump-priming part of the Marshall Plan, its biggest effect was to create a debt forgiveness program that effectively wrote off German government debts of 350 per cent to 400 per cent of its pre-war economy, created a new currency, and organised a workable trade area. This allowed the German economic miracle to happen.

As an act of forgiveness it was remarkable, particularly when you remember that the international dimension of that German borrowing was largely extracted at gunpoint. It would not, of course, have been possible without the leadership of the Americans.

Today America is not engaged, but we still need leadership. Somebody needs to point out the different varieties of disaster that face both Greece and the European project if they do not exercise some imagination in finding a bold solution to this conundrum.

The UK is perfectly placed, as a nation that has much to lose but is not in the Euro, to help broker a deal. The Prime Minister should draw inspiration from the Marshall Plan, and propose a similar set of measures for Greece. Who knows, it may even come to be called the Cameron Plan.

It is the time for generosity and open-mindedness on both sides. The Europeans need to abandon the idea of punishing anyone who looks to leave the Euro. The Greeks need to recognise that they have responsibilities too. The removal of Varoufakis as Finance Minister is a strong sign that they recognise this, and are looking for a deal. We should use this opportunity to get a solution that is permanent, not yet another one where we kick the can down the road for another six months.

There needs to be an acknowledgment that Greece cannot possibly pay its debts, and so needs a debt forgiveness programme – or if it fits the accounting cosmetics better an interest free deferral for a decade or two. And it is vital that Greece not be shut out of the EU trade area. Ancient Greece dominated the Mediterranean through trade, there is no reason why modern Greece with its influential shipping interests cannot become a trade power once more. Combined with exit from the Euro and the subsequent inevitable drachma devaluation, Greece’s economy will then be in a position to grow again.
There will be opposition, from Europe and from some Greeks. Creditors will be unhappy with any debt relief, but they must face the consequences of their reckless lending.

Similarly, many Greeks will be understandably concerned about having their wealth redenominated from Euros into Drachma, although most wealthy Greeks have already moved their money or themselves. They must not cling onto the illusion of security at the expense of their fellow countrymen’s prosperity.

Greece undoubtedly has difficult times ahead. But Europe faces a choice. They can leave Greece to flounder, and helplessly watch as economic contagion spreads across the continent. Or they can take the long-sighted approach, respect Greece’s democratic decision and offer Greece assistance in overcoming her troubles.