A Way Out for Greece and Europe: Keynes’ Advice from the 1940s

By Marie Duggan

Is there a way for Greece to honor its debts without impoverishing its people? Most people see only two ways out of the current crisis: Either Greece services its debts, and the wealth gap between creditor and debtor nations in Europe rises; or Greece defaults, and the European banking system is forced to write-down its assets by the value of the Greek IOUs. However, there is a third way: creditors could promise to spend the money they receive from Greece (in the form of debt service payments) on Greek imports or on long-term for-profit investments in Greece. This third way involves re-aligning institutional incentives so that the creditors only gain when the debtors themselves grow.

Problems like those Greece faces are not new. And, in fact, the best solutions are not new either. During the Second World War, Britain faced a similar situation of trade deficits coupled with a cut-off of international credit. John Maynard Keynes devised a solution which did not impose all the burdens on the debtors by reducing wages. Instead, it would not be just debtor countries—but also creditor countries—that would have to “adjust.” The creditors would have to spend their surpluses (rather than building up reserves), allowing the debtors, in turn, to grow their economies and pay back their debts. Dependence on the fickle whim of the foreign investor is the story line that unites the post-war British context with that of Greece today. In another similarity, the subtext for Greece, since it joined the eurozone in 2001, has been the need to increase its productive capacity and infrastructure so that its products—priced in euros—are produced efficiently enough to compete with those from other eurozone countries. A solution like the one Keynes proposed for Britain towards the end of the war would offer Greece the best way out today.

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