In the iconic 1955 film Rebel Without a Cause, the charismatic James Dean played a dangerous game of "chicken." Driving stolen cars, Jim and Buzz sped toward a cliff. The first to jump for safety was "chicken," while failure to jump spelled disaster.
A charismatic Alexis Tsipras and his party, Syriza, is now playing the same game against Brussels and Berlin (B&B). The new Greek Prime Minister first preached a fiery rhetoric: reversal of austerity and repudiation of external debt. His Finance Minister, a clever economist called Yanis Varoufakis, advocates linking debt repayment to gross domestic product growth, in principle a good idea. B&B have not blinked, claiming that austerity was starting to work, and that adherence to conditions attached to the European Union/European Central Bank/International Monetary Fund, or "Troika," bailouts is sacrosanct. Not least, they preach that full repayment of debt is sacrosanct.
This could not be further from the truth. Five years of austerity was the root cause of a 25-per-cent decline in GDP, 20-per-cent malnutrition among children and 50-per-cent youth unemployment. The "turnaround" amounts to recent GDP growth of 1.9 per cent, and a small decline in youth unemployment.
Austerity for Europe is now in more disrepute than ever among most Spaniards, Italians and even the French – not to mention many recent recipients of the Nobel Prize in economics. And writeoffs of sovereign debt for terminally troubled borrowers have long been deemed win-win for debtors and creditors alike by most experts: The Brady Plan of 1989-95 successfully jump-started growth in 25 Latin American, Eastern European and East Asian countries.
B&B are blind to this. Their disastrous strategy for Greece was wrong-headed from its outset in 2010, when they dithered on debt reduction and imposed fiscal cuts that made repayment ever more difficult. Worse, their "bailout" strategy amounted to lending roughly another $200-billion (U.S.) to Greece, most of which was simply recycled to pay back outstanding debt, and, not incidentally, shield German and French banks from arrears. Fiscal cuts and unemployment caused Greek's GDP to plummet, and its ratio of debt to GDP almost doubled to 179 per cent, the world's highest after Japan. Japan can afford it; Greece can't.
Is there a way out? B&B point out that interest payments on outstanding debt now amount to only 3 per cent of GDP. But this ignores repayment of principal, which will hang like a Diocletian sword over Greek heads for decades to come.
B&B also insist that the conditions attached to the bailouts are written in stone. But they may not speak for the IMF. Managing director Christine Lagarde now says off the record that had the Troika written off the bulk of Greek sovereign debt back in 2010, their meltdown, not to mention the poisonous contagion to half a dozen other European countries, would likely have been avoided. Similarly, the ECB, under the enlightened leadership of Mario Draghi, has defied precedent and strong objections from the German Bundesbank by buying unprecedented quantities of euro zone sovereign bonds.
But Mr. Draghi's courage will not be enough. Mr. Varoufakis found that out after his colourful charm tour of Madrid, Rome and Berlin last week, when Mr Draghi rebuffed his request for emergency loans from the ECB.
And Ms Lagarde's regret notwithstanding, the IMF is unlikely to split from the Troika either. No developed country has ever defaulted on an IMF loan. But developing countries have – for example, Guyana did in the mid-1980s, and was ultimately rescued by a short-term bridge loan from country donors led by Canada. (Full disclosure: I was involved as a consultant.) Intriguingly, Syriza now muses about seeking bridge loans from the U.S., Russia and China. This, on the heals of its reluctance to endorse the EU's call for more sanctions on Russia, has played right into Vladimir Putin's plans to divide the West: His Foreign Minister, Sergey Lavrov, has now proffered help to Greece.
For both economic and political reasons, it is crucial to keep Greece in the EU, if not perforce the euro zone. How can B&B be persuaded to compromise? The answer is that Syriza must blink first, by backing down on some of its most misguided proposals. First and foremost, Mr. Tsipras must rethink his plan to reverse privatization – already under way by his announcement that the gigantic ports system will be re-nationalized, along with the power companies and much more. This can only restart the bleeding of public revenues that caused previous Greek governments to become bankrupt in the first place.
A far wiser plan would be to offer debt-equity swaps – in effect offering holders of Greek debt a market-based, deeply discounted price, which would then be sold off to investors, domestic or foreign, and swapped for ownership of state assets. Such swaps were successfully used by Mexico, Chile, Brazil and others at the height of their 1980s debt crises.
That said, rehiring tens of thousands of laid-off workers is a nice idea in principle, but it must be done primarily via private sector growth. Certainly, massive and persistent youth unemployment is not only immoral and soul-destroying, it is dangerous. Greece has already endured rioters and vigilantes, and is lucky it got only a socialist government, not a bloody revolution. But perpetuating a bloated civil service, ferry system or train service is the opposite of the kind of reform Greece needs. In short, creating employment for its youth will be a huge challenge, but it is one that all ideologies can embrace. Syriza cannot afford to eschew the private sector, including foreign investment. Otherwise the flower of its youth will move to Britain, the U.S., Canada or Australia.
Finally, Syriza should tackle tax collection. Unlike previous governments, it is not beholden to wealthy tax dodgers. It should also collect from the middle class, with whom it is manifestly popular, perhaps at a lower rate on a broader base.
In short, Syriza and B&B must both put the brakes on their rhetoric; otherwise they are headed for a cliff. The deadline for repayment of a large tranche of bailout money is the end of February; if Syriza does not pay, or if B&B do not offer partial postponement, their game of "chicken" may hurtle Greece off a cliff and doom B&B to eternal guilt.
James W. Dean is a professor of economics at Simon Fraser University. He has written extensively on financial crises and voluntary debt reduction.