January 23, 2015

On January 25, Greece will decide whether to transform the anti-austerity Syriza Bloc from a once-radical sideshow into the central player in Greek politics – a development that can either be treated as an opportunity or an ill omen.

The rise of parties like Syriza across the European Union makes it clear that the status quo is on its last legs. If policymakers in Athens, Brussels, and Berlin want to avoid risking the uncontrolled disintegration of the European economic space, it’s time to take a cautionary look back at The Great Transformation, Karl Polanyi’s 1944 study of the last time Europe imploded.

Polanyi argued that people fight back when markets become so big and powerful that society can no longer control them. Democratic governments that become powerless to do anything but hem to foreign economic agreements and bow to the pressures of foreign creditors don’t last long. As governments fall, the international systems they held together unravel.

As an Hungarian Jew who fled Vienna in 1933, Polanyi learned this lesson firsthand. Weimar Germany had been saddled with a fixed exchange rate it couldn’t change, hurting the country’s exports. It responded by trying to reduce prices through austerity, driving up unemployment. Germany’s skittish creditors demanded repayment of debts, forcing interest rates higher.

The result of this toxic brew was the Weimar regime’s loss of legitimacy and the rise of National Socialism. The Nazis were uniquely extreme; nevertheless, the mix of fixed exchange rates, austerity, unemployment, and fearful international capital should be troublingly familiar in Europe today. Countries like Greece are in a Weimar-esque bind – and recent events have underscored that the pushback from the people is getting stronger.

Few of the solutions on offer are promising. The pat European approach has been to keep the Greek government afloat while pretending that Greece can someday pay back the debts that it has accumulated. In exchange, Greece has tried to cut its way to both fiscal sustainability and export competitiveness. Despite signs that the Greek economy has bottomed out, Syriza argues that the situation is untenable – an election victory would prove their point.

However, a unilateral re-nationalization of economic policy would create new problems. A Greek default and exit from the euro would help boost exports, but would also wipe out households’ savings, drastically reduce purchasing power, and cut Greek banks off from the rest of the world. Syriza’s leader, Alexis Tsipras, has no unilateral policy options that are any better than the status quo – a fact he appears to have acknowledged.

This brings us back to Polanyi. Both Greece and its European creditors are guilty of believing that they can have a highly integrated transnational economy and national control over economic outcomes at the same time. That has to change.

First, Europe’s capacity to regulate and shape economic outcomes must be scaled up to the size of the European marketplace itself. This means completing the European banking union – including a common deposit insurance plan. It means ensuring the macroeconomic imbalances warning system actually works. Most importantly, it means creating a limited quantity of low-risk debt backed by all eurozone governments.

Second, this election should be taken as an opportunity to draw a line under the Greek situation through debt forgiveness. While there is no question that successive Greek governments were irresponsible, its creditors are not blameless either. There is no future in which Greece’s creditors are paid what they are owed today; the only question is how orderly the write-down will be.

Germany, in particular, will balk at commitments that would let the Greeks off easily. However, those protests are less salient than the ones racking Greece: the potential costs to German citizens are small – and few countries benefit more from the euro than Germany does.

Accommodating Syriza might also embolden other anti-system parties like Podemos in Spain. That problem exists whether or not Syriza is mollified. Agreeing to a repeatable formula with Tsipras is more pragmatic than hoping no other radical parties seize power.

Finally, there is the moral hazard problem. If Greece is forgiven, what prevents others from borrowing and borrowing, knowing they will be let off the hook? A recipe for emulation Greece is not: more than one in four Greeks remain out of work and fewer than half of young people can find jobs.

EU members must either scale up society’s tools for managing markets at the European level or scale down their degree of international economic integration. The latter is easier, but risks the broader collapse of European stability. The former is the better – but harder – choice.

This article was published on EurActiv