By imposing budget cuts and austerity, the ECB is condemning countries like Greece and Spain to an economic twilight zone
Jamaica, an English-speaking Caribbean island nation of 2.9 million people, may seem worlds away from Europe. The country’s income per person of $9,000 ranks it 88th in the world, as compared to the eurozone countries, which are three or four times richer. But they face a common problem, and although none of the eurozone countries is likely to become as poor as Jamaica is today, they could easily – going forward – mimic the dismal economic performance that Jamaica has seen over the past 20 years.
Jamaica has the world’s highest public debt burden: interest payments on the government’s debt account for 10% of the country’s national income. (For comparison, Greece – with the worst debt burden in Europe – is paying 6.8% of GDP in interest.) This leaves little room for public investment in infrastructure, or improving education or healthcare. Partly as a result of this debt trap, Jamaica’s income per person has grown by just 0.7% annually over the past 20 years.
Two years ago, Jamaica reached an agreement with its creditors, brokered by the IMF, that restructured its debt. Interest payments were lowered, and some principal payments were pushed forward. But the debt burden remained unsustainable. The IMF now projects that Jamaica’s debt will reach 153% of GDP in just three years.
Sound familiar? That is what happened to Greece just four months ago. The Greek government reached an agreement with the European authorities (the “Troika” of the European Central Bank or ECB, the European Commission, and the IMF) that reduced its debt. Unlike in Jamaica, the private investors holding Greek debt took a “haircut”, losing about half of the principal.
But still, it wasn’t enough. Before the ink was dry on the deal, an IMF estimate of a “pessimistic scenario” going forward showed Greek debt reaching more than 160% of GDP by 2020. Since the IMF’s projections for Greece over the past few years have proved enormously over-optimistic, and with Europe sliding further into recession, the pessimistic scenario is the more likely one. This means that even if Greek voters end up with a government that accepts the agreement – by no means guaranteed – it is likely that their economy will limp along from one crisis to the next until there is another restructuring, or a chaotic default.
In both Greece and Jamaica, the problem is not just the debt itself; even more, it is the policies that the creditors have attached to further lending. In Greece, this is extreme: the Troika insisted on Greece cutting 8.6% of GDP from its fiscal deficit over the past two years – the equivalent of the United States wiping out its entire federal budget deficit of $1.3tn. Naturally, the economy went into a tailspin. In Jamaica also, the IMF attached conditions during the 2008-2009 economic crisis that worsened the country’s downturn.
Europe’s problem with harmful policies attached to official lending is not limited to Greece. Dow Jones’ recent headline tells the sad story of Portugal in a sentence: “EU: Portugal Will Need More Austerity To Meet Deficit Targets.” Yes, the European Commission wants Portugal to make even bigger budget cuts because the ones they already made have shrunk the economy so much that they won’t make their target deficit-to-GDP ratio. The economy is projected to shrink by a painful 3.3% this year, and official unemployment has risen from 12.9% last year, to 15.3% this. Ireland is in recession, yet it, too, is engaging in big budget tightening.
Spain hasn’t yet had to borrow from the Troika, but has followed the same policies. With more than half of its youth languishing in unemployment, Spain’s fiscal tightening – according to the government’s projections – will carve 2.6% out of its economic growth this year.
Of course, there are many important differences between the situation of the eurozone countries and Jamaica, and among the eurozone countries themselves. Jamaica needs debt cancellation; some of the eurozone countries in trouble – for example, Spain – would have a sustainable debt burden if the ECB would simply intervene in the sovereign bond markets and guarantee a low interest rate on their bonds. And the ECB, as the issuer of a hard currency in a monetary area with no serious inflationary threat, has a lot of room to do whatever is necessary to make sure that all of the eurozone countries have low borrowing costs and therefore sustainable debt.
But the ECB has refused to use its powers to put an end to the sovereign debt crisis, preferring instead – hand-in-hand with the rest of the Troika – to exploit it in order to force unpopular political changes in eurozone countries, especially the weaker ones. In so doing, they are condemning these countries to the long-term stagnation of high unemployment and slow growth that Jamaica has suffered for the past two decades. Although the human costs are much higher in a developing country such as Jamaica, this still entails a huge amount of unnecessary suffering on both sides of the ocean.