Greece: default or devastation

From the New Economics Foundation site

The only hope for the future of Greece lies in rejection of the Troika, a default on Greek terms and leaving the grossly oppressive structures of the euro argues James Meadway

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egotiations in Greece hang by a thread. With Greece needing to meet the next tranche of debt repayments by March 20, or else face default, its creditors are jittery. The deal passed by the Greek Parliament on Sunday should pave the way for both €130bn of bailout funding, and a restructuring of Greece’s debt. But additional assurances have been demanded by the EU/ECB/IMF Troika from Greek political parties that, whatever the outcome of April’s elections, they will observe their side of the deal – austerity measures of exceptional severity. With all the backbone and fortitude for which they have become rightly famous, Greece’s politicians of the centre have meekly signed up.

They should not have done so. The deal is the latest in the long line of brutal calamities inflicted on Greece. Not that much of the reporting here in the UK would tell you this. For months, the lie has been peddled that Greeks are lazy, spendthrift, and have brought the crisis on themselves. This is xenophobic garbage. Greeks work the longest hours in Europe – half as much again, every year, as the Germans. They retire, on average, later than Germans. The Greek government spends less than the EU average, as a share of GDP.

Tax collection is weak, but this – like other developed economies – is driven by misreporting from self-employment, and avoidance by the wealthy. An LSE study found that the richest 1 per cent in Greece under-report their incomes by 24 per cent, compared to 6 per cent for average earners (table 4 in the link).

This is not a Greek crisis. It is a European crisis, focused on Greece. It is the product of a collision between the financial crash of 2007-8, and the unstable structures of the eurozone itself. As the global banking system collapsed, spectacularly, following the bankruptcy of Lehman Brothers in September 2008, it provoked a sharp recession, and emergency bailouts from governments. Deficits and debts accelerated everywhere.

But inside the eurozone, this sharp rise in indebtedness collided with existing imbalances. The creation of the euro in 1999 fixed member economies’ exchange rates, relative to each other. Successful efforts by German governments to hold down wages and salaries, and remove social protection, led to a relative reduction in labour costs – compensating for weak productivity growth. Within the eurozone, this made exports from Germany into southern Europe appear cheap. Under normal circumstances, exchange rates might adjust to cope. But since the euro effectively locked countries into an exchange rate, relative to each other, no adjustment was possible. For ten years, rising trade surpluses in northern Europe were matched by rising trade deficits in the south.

Those deficits had to be paid for. The mechanism was debt: northern surpluses were recycled, through the financial system, as debts for southern Europe. This enabled the whole imbalanced system to keep rolling onwards, at the cost of growing indebtedness throughout the south.

The system was inherently fragile. It could not cope with the additional burden of the financial crisis. As governments scrambled to cope, over 2009, they borrowed. But all money is borrowed from somewhere. Every debtor has a creditor. In a perverse twist, European governments borrowed from the same banking system they were attempting to support. European banks were quite happy, over 2009, to lend to indebted governments, seemingly in the belief that euro members could never default.

A crisis of private finance became, through the recessions and the bailouts, a crisis of public debt. That crisis of public debt is now feeding back into the private financial system. For over two years, since the revelation, in October 2009, that previous Greek governments had been disguising their true debt levels, Europe has attempted to manage a dangerously volatile situation.

It has very largely failed. Worse: the Troika’s sheer ineptitude has actively worsened the situation. Austerity – sharp cuts in public spending – was the only solution offered to debtor nations. But cutting public spending to repay heavy debts is self-defeating. Take Greece. In late 2009, its national debt was 130 per cent of GDP. After two years of austerity measures, of increasing severity, that debt is set to hit more than 160 per cent of GDP. By strangling real economic activity, austerity destroys the ability of an economy to repay debt. The cost of this failure is immense: in blunt monetary terms, the Greek economy has shrunk by 20 per cent since the crisis broke. But the human cost is worse: to pick just one example, the Greek suicide rate has increased 40 per cent in the last year. It was once the lowest in Europe. An entire country is being torn apart.

Alongside the staggering failure of austerity, the Troika – aided and abetted by a craven Greek political class – has been in a state of denial. Greece’s national debt is unpayable. There is no reason to bleed the country white trying to repay it. Default has to happen. But for much of the last two years all sides pretended otherwise, offering failed rescue package after failed rescue package.

The latest deal, passed by the Greek Parliament on Sunday, at least breaks with that tradition. Instead it offers something worse: in their munificence, the Troika will allow Greece to “restructure” its debt, reducing the burden by around 70 per cent, and still remain a euro member. In return, it must rip apart whatever social protections are left, sell off whatever remaining assets can be found, reduce the economy – and, disturbingly, tear the heart out of Greek democracy.

Elections are scheduled for April. The three main parties of the far left, all of them opposed to the Troika, are polling over 40 per cent. In these circumstances, whether elections will occur is increasingly moot. Wolfgang Schäuble, the German finance minister, has already hinted at their suspension. Most likely they will proceed, with the centre parties’ agreement to observe Troika demands.

If there is any hope for the future here, it lies in the rejection of the Troika. That means a default on Greek terms. It means leaving the grossly oppressive structures of the euro, and reclaiming sovereignty over fiscal and monetary policy. This is not easy option: bankrupt banks will need nationalising. Capital and exchange controls will be necessary to break a speculative panic. The months after default will be difficult. But the alternative is to accept a permanent slide into impoverished vassalage.