On the Greek tragedy: time for cooler heads to prevail

Talks between Greece and the European authorities over Greeces debt broke down this week, leaving the future of Europe in doubt. Can this be what unravels the common currency?

On Jan.25, Greece elected a new political party with the democratic mandate to put an end to austerity policies. To get a good understanding of the current desperation, consider some basic facts: Greeks economy shrank by 30 per centsince before the crisis began in 2010; unemployment has skyrocketed to 27 per cent(more than 60 per centfor youth unemployment), and Greek debt now stands at more than 170 per centof current GDP.

The Greek population has chosen to put an end to the scourge of austerity.

With a fresh mandate from its people, the government, led by theSyrizapartys leader AlexisTsiprasand Finance MinisterYanisVaroufakis, put Europe on notice that it was no longer bound by the austerity policies imposed on Greece policies that contributed to Greeces economic predicament.

What we know now with certainty is that austerity policies can never restore prosperity and contribute to economic growth.In fact, the opposite happened.

Despite promises that austerity would restore sound finance and reduce Greek debt, it increased debt levels to highs rarely seen before.

The question facing Greece now is: what can be done?

Its not an easy question to answer, as the situation is complicated by political and ideological problems. While theSyrizaparty is on the left of the political spectrum, the rest of Europe so far, or at least theEurogroupinfluenced by AngelaMerkeland Germany, is on the right.

Politics and ideology are sure to clash over the vision and the economics of the right path to follow.

As a result, it is clear that Greece and the rest of Europe are now far apart on these issues.Greece, it is worth mentioning, is not demanding a bailout or a hair cut (a reduction in its debt commitments), but rather a 'bridge'that is a renegotiation of the terms of its debt that would give it much-needed breathing roomnot unlike what many of us would ask from the bank if we had financial difficulties.

Reasonable solutions

TheEurogrouphas refused all demands from Greece.

Yet, there are some reasonable solutions floating around.Notably, there is the idea of tying Greek repayment to the growth of its economy, commonly known as GDP-linked bonds.This would act in a sense like a haircut, without really being one.

Such a proposal has considerable merit, and would tie the repayment of Greek debt to the growth of Greeces real economy, thereby making such payments more manageable.Debt repayment would therefore vary according to GDP performance.

There are a number of advantages for Greece, such as the counter-cyclical nature of this policy, allowing the country to reduce its repayment when the economy slows or goes into recession. It would also stabilize the debt by lowering the possibility of a Greek default.

So far, this solution has been rejected by the Eurogroup, for reasons that are not entirely clear. Currently, some 80 per centof Greek debt is owned by the Troika, that is the European Commission, the International Monetary Fund, and the European Central Bank.

Hence, refinancing the existing debt would not jeopardize banks. Therefore, renegotiations would seem to be a reasonable solution to an impossible situation.

What makes the situation even more troublesome is that according toVaroufakis, who spoke at a news conference after the collapse of the latest rounds of talk, Greece was made an offer that it could have signed, thereby putting an end to this financial imbroglio, only to have it taken away at the last minute and replaced with another agreement thatVaroufakiscalled "absurd" and "unacceptable."

If this is true, it suggests politics got the better of the situation. And this is unfortunate.

Underlying revolt

Germany is worried that whatever deal is made with Greece, it will be demanded by Spain if the Podemos party wins the next election. Podemos is led by the young, charismatic leader Pablo Iglesias, and polls give him an early lead.

The Podemos party is very close, ideologically, to the Syriza party. If it wins it will be Greece all over again, and this may give a boost to similar parties all over Europe.

Then comes France with the rise of the Front national, which has committed itself to withdrawing France from the Euro altogether.Although a long shot, Marine Le Pen will certainly command an important following.

What cannot be denied is the underlying revolt occurring across Europe as austerity has created havoc beyond imagination. Four years ago, it was promised that austerity, also known as fiscal consolidation, would bring growth and prosperity, but it has only brought misery and near-depression.From a Keynesian perspective, this was predictable.

It is now unclear what the next move in Greece's negotiations will be. Failure to reach a settlement will undoubtedly put the future of the Euro in jeopardy. Greece may have no other choice but to leave or face being kicked out, which would certainly wreak havoc on Europe.

It is time for cooler heads to prevail, and for a deal to be reached.

Louis-PhilippeRochon is an associate professor atLaurentianUniversity and co-editor of the Review of Keynesian Economics.