Financial Times
January 4, 2015
This is going to be the year in which the eurozone will have its moment of truth. Three scheduled elections — in Greece this month; in Portugal and in Spain in the second half of the year — will tell us whether the EU’s approach to crisis resolution works politically or not. The probability of at least one political upset is very high indeed. In both Greece and Spain, parties of the hard left lead the polls.
In Greece, the political choice is essentially between the status quo of fiscal austerity and an alternative of negotiated debt default. The economic argument for the second course of action is compelling. Greek debt runs at 175 per cent of gross domestic product. The country does not need to service all that debt right now. Greece pays no interest on the “official” debt from the EU until 2023. But this is only eight years away — well within the horizon of any long-term investor.
The official EU policy towards Greece is best described as debt forbearance — of recognising a debt problem, and delaying the inevitable. It is also the policy of Antonis Samaras, the Greek prime minister, and his coalition government. It is a version of extend-and-pretend: extend the loans, and pretend that you are solvent. The history of international debt crises tells us that these strategies are always tried, and always fail.
Now, add deflation to this mix. From this month onwards, eurozone headline inflation rates could turn negative, due to the most recent fall in the oil price. Deflation raises the real value of debt, and could push Greece over the brink.
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