Ahead of Greece’s general election on Sunday, the business press claims that the country is bouncing back from its years of austerity. Yanis Varoufakis tells Jacobin why, for ordinary Greeks, the situation is only getting worse.
Source: Yanis Varoufakis: Greece’s Debt Is More Unsustainable Than Ever
Mitsotakis isn’t a rally-rouser. He doesn’t take the populist tone or stoke divisions. And within days he could be prime minister of Greece.
Greece is not the only European country to see such a reversal. In Denmark last month the centre-left Social Democrats returned to power, partly thanks to a collapse in votes for the anti-immigrant Danish People’s Party which had been informally supporting successive right-wing governments in exchange for ultra-nationalist policies (in 2017 the Danish minister for immigration posted a photo of a cake on Facebook celebrating 50 new laws tightening immigration rules).
via Greek election: centre-right opposition leader Kyriakos Mitsotakis ahead in polls
John Pilger .com
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USA Today‘s editorial board published a misleading editorial comparing the economic crisis currently crippling Greece with the economic problems facing the United States, fear mongering that a similar crisis could happen “in as little as a decade.” But economists have repeatedly dismissed the comparison, explaining that the U.S. economy is dissimilar from Greece and therefore unlikely to face a similar debt crisis.
On July 6, the editorial board published a piece claiming that the United States could find itself in a Greece-like economic and financial crisis as a result of America’s debt and entitlements. According to the editorial board, “Greece is just further along” in its debt crisis however, Americans can expect a major shock “in as little as a decade.”
Both countries have amassed large debts. Both are run by politicians eager to tell voters what they want to hear about national finances, not what they need to hear. Both have aging populations. Both are familiar with irresponsible banks lending to irresponsible borrowers. And both have been plunging headlong towards debt crises.
Greece is just further along.
[…]
Yet efforts to even modestly curtail health benefits, or any other “entitlement” programs for that matter, meet thunderous opposition from politicians, labor unions, senior citizen groups and others. Often, the objections are couched in language of people having “earned” their benefits after a lifetime of work.
In fact, they’ve earned a portion of their benefits. An average couple that retired in 2010, for instance, will receive $387,000 in Medicare benefits after having paid $122,000 in Medicare taxes while working. Social Security is in somewhat better shape but it, too, will soon have to start drawing down its reserves, adding more red ink to the budget.
Unless benefit programs are reined in, America is heading for its own debt crisis. It won’t be complicated by whether it should drop out of a currency union. And it might be delayed by a vibrant and innovative private sector. But it could arrive in as little as a decade. And then everything will seem Greek to us.
USA Today‘s doom and gloom predictions are indistinguishable from the cartoonish fearmongering that has been promoted by Fox News since 2010.
But many economists rebuff these dire predictions posited by media outlets over the past five years.
Washington Post contributor and international political economist Daniel Drezner blasted media outlets for allowing the “re-emergence of a Greece-related meme that should have died of shame and embarrassment about four years ago.” According to Drezner, after years of the media predicting a Greek-like disaster “exactly none of these things have come to pass.”
And on the July 5 edition of ABC’s This Week, Nobel Prize-winning economist Paul Krugman downplayed the impact of the Greek debt crisis for other developed economies, explaining that Greece’s GDP is roughly equal to that of Miami, Florida. Krugman also argued in his New York Times column that U.S.-Greece comparisons are unreliable, since they project debt in future decades and assume fiscal policies remain static.
Um, that’s comparing a (highly uncertain) projection of debt 20 years from now — a projection that’s based on the assumption of unchanged policy — with actual debt now. Actual US federal debt is only about half that high now. And it’s worth pointing out that Greek debt is projected to rise to 149 percent of GDP over the next few years — and that’s with the austerity measures agreed with the IMF.
[…]
Basically, the United States can expect economic recovery to bring the deficit down substantially; Greece, which has a larger structural deficit and also faces a grinding adjustment to overvaluation with the eurozone, can’t.
Yes, the United States needs fiscal adjustment — Auerbach and Gale say that we have a long-run fiscal imbalance of 6-plus percent of GDP, although much of that could be closed by reining in health costs. But we really don’t look much like Greece.
From laissez-faire economics in 18th-century India to neoliberalism in today’s Europe the subordination of human welfare to power is a brutal tradition
Starving people clamour at the gates of a workhouse during the Irish famine,’One eighth of the population was killed – one could almost say murdered – by the British refusal [to set] policies that offended the holy doctrine of laissez-faire economics.’ Photograph: Hulton
Greece may be financially bankrupt, but the troika is politically bankrupt. Those who persecute this nation wield illegitimate, undemocratic powers, powers of the kind now afflicting us all. Consider the International Monetary Fund. The distribution of power here was perfectly stitched up: IMF decisions require an 85% majority, and the US holds 17% of the votes.
The IMF is controlled by the rich, and governs the poor on their behalf. It’s now doing to Greece what it has done to one poor nation after another, from Argentina to Zambia. Its structural adjustment programmes have forced scores of elected governments to dismantle public spending, destroying health, education and all the means by which the wretched of the earth might improve their lives.
The euro will be stuck with austerity unless it learns to embrace democracy
The same programme is imposed regardless of circumstance: every country the IMF colonises must place the control of inflation ahead of other economic objectives; immediately remove barriers to trade and the flow of capital; liberalise its banking system; reduce government spending on everything bar debt repayments; and privatise assets that can be sold to foreign investors.
Using the threat of its self-fulfilling prophecy (it warns the financial markets that countries that don’t submit to its demands are doomed), it has forced governments to abandon progressive policies. Almost single-handedly, it engineered the 1997 Asian financial crisis: by forcing governments to remove capital controls, it opened currencies to attack by financial speculators. Only countries such as Malaysia and China, which refused to cave in, escaped.
Consider the European Central Bank. Like most other central banks, it enjoys “political independence”. This does not mean that it is free from politics, only that it is free from democracy. It is ruled instead by the financial sector, whose interests it is constitutionally obliged to champion through its inflation target of around 2%. Ever mindful of where power lies, it has exceeded this mandate, inflicting deflation and epic unemployment on poorer members of the eurozone.
The Maastricht treaty, establishing the European Union and the euro, was built on a lethal delusion: a belief that the ECB could provide the only common economic governance that monetary union required. It arose from an extreme version of market fundamentalism: if inflation were kept low, its authors imagined, the magic of the markets would resolve all other social and economic problems, making politics redundant. Those sober, suited, serious people, who now pronounce themselves the only adults in the room, turn out to be demented utopian fantasists, votaries of a fanatical economic cult.
Those sober, suited, serious people turn out to be demented utopian fantasists, votaries of a fanatical economic cult
All this is but a recent chapter in the long tradition of subordinating human welfare to financial power. The brutal austerity imposed on Greece is mild compared with earlier versions. Take the 19th century Irish and Indian famines, both exacerbated (in the second case caused) by the doctrine of laissez-faire, which we now know as market fundamentalism or neoliberalism.
In Ireland’s case, one eighth of the population was killed – one could almost say murdered– in the late 1840s, partly by the British refusal to distribute food, to prohibit the export of grain or provide effective poor relief. Such policies offended the holy doctrine of laissez-faire economics that nothing should stay the market’s invisible hand.
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When drought struck India in 1877 and 1878, the British imperial government insisted on exporting record amounts of grain, precipitating a famine that killed millions. The Anti-Charitable Contributions Act of 1877 prohibited “at the pain of imprisonment private relief donations that potentially interfered with the market fixing of grain prices”. The only relief permitted was forced work in labour camps, in which less food was provided than to the inmates of Buchenwald. Monthly mortality in these camps in 1877 was equivalent to an annual rate of 94%.
As Karl Polanyi argued in The Great Transformation, the gold standard – the self-regulating system at the heart of laissez-faire economics – prevented governments in the 19th and early 20th centuries from raising public spending or stimulating employment. It obliged them to keep the majority poor while the rich enjoyed a gilded age. Few means of containing public discontent were available, other than sucking wealth from the colonies and promoting aggressive nationalism. This was one of the factors that contributed to the first world war. The resumption of the gold standard by many nations after the war exacerbated the Great Depression, preventing central banks from increasing the money supply and funding deficits. You might have hoped that European governments would remember the results.
Greek debt crisis: Tsipras gets ultimatum to reach deal or face Grexit – as it happened
On Sunday, European leaders will meet for a summit that will decide whether Greece gets another bailout or leaves the eurozone
Read more
Today equivalents to the gold standard – inflexible commitments to austerity – abound. In December 2011 the European Council agreed a new fiscal compact, imposing on all members of the eurozone a rule that “government budgets shall be balanced or in surplus”. This rule, which had to be transcribed into national law, would “contain an automatic correction mechanism that shall be triggered in the event of deviation.” This helps to explain the seigneurial horror with which the troika’s unelected technocrats have greeted the resurgence of democracy in Greece. Hadn’t they ensured that choice was illegal? Such diktats mean the only possible democratic outcome in Europe is now the collapse of the euro: like it or not, all else is slow-burning tyranny.
It is hard for those of us on the left to admit, but Margaret Thatcher saved the UK from this despotism. European monetary union, she predicted, would ensure that the poorer countries must not be bailed out, “which would devastate their inefficient economies.”
But only, it seems, for her party to supplant it with a homegrown tyranny. George Osborne’s proposed legal commitment to a budgetary surplus exceeds that of the eurozone rule. Labour’s promised budget responsibility lock, though milder, had a similar intent. In all cases governments deny themselves the possibility of change. In other words, they pledge to thwart democracy. So it has been for the past two centuries, with the exception of the 30-year Keynesian respite.
The crushing of political choice is not a side-effect of this utopian belief system but a necessary component. Neoliberalism is inherently incompatible with democracy, as people will always rebel against the austerity and fiscal tyranny it prescribes. Something has to give, and it must be the people. This is the true road to serfdom: disinventing democracy on behalf of the elite.
![Greek PM Alexis Tsipras attends a wreath-laying ceremony at the Tomb of the Unknown soldier in Moscow, Russia [EPA]](https://i0.wp.com/www.aljazeera.com/mritems/imagecache/mbdxxlarge/mritems/Images/2015/4/8/bd698a83023c414cbbd1d32ac36641b0_18.jpg "Greece's overtures to Russia may not be a sideshow")
Greek Prime Minister Alexis Tsipras’ visit to Moscow this week for talks with President Vladimir Putin has fuelled wild speculations about the real intentions of the Greek government.
The visit is taking place while bailout talks between Greece and Europe have reached a very critical juncture.
Greece is again on the verge of bankruptcy, but its euro partners insist that the government stay the course with its austerity programme and the neoliberal structural reforms before they unlock more aid.
While it is hard to say what the Greek prime minister hopes to achieve from his talks with Putin, his overtures towards Russia may represent a sincere attempt on his part to reorient the country’s strategic interests as well as reflect a sense of deep frustration with Greece’s euro partners.
And for good reason.
Catastrophe
The financial bailouts by the European Union and the International Monetary Fund have created an economic and social catastrophe of unprecedented proportions for an advanced western nation in peacetime conditions.
Greece’s GDP has sunk by 20 percent since 2010, its level of sovereign debt has risen as a share of GDP to 176 percent, the unemployment rate has exceeded the 25 percent mark, and one out of three Greeks live near or below the poverty line.
The general explanation on the part of Greece’s euro partners and in much of the western media for this dramatic situation is that Greek authorities have been slow in introducing structural reforms while hinting at the same time that the Greek people are lazy.
However, the facts on the ground tell a different story. First, major reform policies have been fully implemented across the private sector labour market, which include increasing labour market flexibility and substantially reducing wages and salaries.
Second, the number of public sector employees has been slashed by over 30 percent since 2009, with corresponding salary cuts ranging anywhere from 28 percent to 35 percent.
Third, public education, public healthcare, transportation, and social services have experienced sharp annual budget cuts since 2010 to the point that Greece may now qualify as a failed state.
| Securing a preferential trade agreement with Russia, and possibly some direct financial aid, will help the country’s beleaguered economy and may force its euro partners to adopt a more flexible approach towards an EU member state which seems to be driven directly into the arms of Moscow. |
Fourth, most state-owned assets have been privatised, and those that still remain under public ownership (certain airports for example) may soon get privatised under pressure by Greece’s main creditors.
Finally, as the ultimate proof of how misguided and culturally biased the prevailing story is about Greece’s current misfortunes, every major study shows that Greeks work more hours than anyone else in Europe.
‘Excessive austerity’
Interestingly enough, the question of why Greece’s economy is in such a mess was pointedly answered by Peter Bofinger, a member on the German Chancellor’s Council of Economic Advisers, in a recent interview on German radio: “excessive austerity”.
In fact, in a private dinner conversation back in late November 2014, Bofinger stated to the author that Greece should have pulled out of the euro when the crisis broke out in May 2010 because he could see the disastrous effects that the bailout plan was going to have on the economy and its people.
The IMF has also admitted on various occasions in the past that it underestimated the negative impact of the austerity measures on the Greek economy, but that did not stop its officials overseeing the bailout of Greece from insisting on more and more of the same deadly medicine.
Today, Greece’s situation is exponentially more dire than it was a few years ago. Liquidity has dried up completely and the debt crisis is no longer confined to the public sector but has expanded into the private sector as well.
The new Syriza-led government has done a lot of screaming about the adverse effects of austerity since it came to power two months ago, but it has failed to convince Greece’s euro partners about the economic and moral merit of its case.
Indeed, both Europe and the IMF insist on the continuation of a failed programme that has caused massive economic damage and untold social pain.
As the eurozone’s unquestionable master, Germany has also refused to consider any talk of a Greek debt write-off, forgetting rather conveniently that its own economic recovery after the war would not have been possible if it was not for the London Debt Agreement of 1953, which cancelled a great portion of German debt.
Germany also impugns the claims of Greece about war reparations. Greece has never been repaid for the hundreds of millions of reichsmarks that the Greek National Bank was forced to give to Nazi Germany during the war or for the atrocities committed on the local population by the German forces during the occupation.
Under these circumstances, it is no wonder why Greece’s leftist government is making overtures towards Russia.
During his talks with Putin, the Greek prime minister may or may not request direct economic assistance from Moscow. He will certainly try, though, to strengthen economic ties between the two nations, especially in the area of energy.
Parallel financial system
In the meantime, the Greek government should not hesitate to introduce a parallel financial system (a “double currency”) in order to address the lack of liquidity and help to boost growth.
And, in the end, if all efforts to convince Greece’s euro partners that the social welfare of a nation’s citizens must take priority over any obligations to creditors fail, an orderly exit from the euro may be the only option left.
It could very well be then that the new Greek government’s overtures towards Russia are in anticipation of an uncertain future regarding Greece’s place in the eurozone, even though its expressed desire is for Greece to remain in the euro.
Securing a preferential trade agreement with Russia, and possibly some direct financial aid, will help the country’s beleaguered economy and may force its euro partners to adopt a more flexible approach towards an EU member state which seems to be driven directly into the arms of Moscow.
As for Russia, it might be willing to provide whatever assistance it can (and without necessarily making financial costs and benefits a priority in its decision-making process) to financially beleaguered Greece in order to have an EU member state on its side.
Greece has already expressed its disagreement over EU sanctions against Russia, and it takes only one EU member to veto sanctions.
In sum, if talks between Greece and Russia lead to a fruitful collaboration between the two countries, the EU will have a hard time keeping Russia in check and may even lose a vital political partner in its quest of a unified Europe.
C J Polychroniou is a research associate and policy fellow at the Levy Economics Institute of Bard College and a contributor to Truthout.org.
The views expressed in this article are the author’s own and do not necessarily reflect Al Jazeera’s editorial policy.
![Pensioners wait for the opening of a National Bank branch to receive their monthly pensions in Athens [REUTERS]](https://i0.wp.com/www.aljazeera.com/mritems/imagecache/mbdxxlarge/mritems/Images/2015/5/28/fb33da2c9d5b4410874d76a70fd741fd_18.jpg "Greece: What went wrong?")
C J Polychroniou is a research associate and policy fellow at the Levy Economics Institute of Bard College.
Two centuries ago, the celebrated English poet Lord Byron published a poem that aptly captured the contrast between ancient Greece and the Greece of his own time. It included these famous lines:
Fair Greece! Sad relic of departed worth!
Immortal, though no more! Though fallen, great!
One wonders what Byron would think of present-day Greece if he were alive today.
For the past five years, Greece has experienced an economic and social catastrophe of unparalleled proportions for an advanced economy in peacetime conditions. The country is now financially bust, and one step closer to an exit from the eurozone.
What went wrong?
How could a nation’s economy that was apparently growing faster in the early to mid-2000s than the economy of any other nation in the eurozone become a basket case in only a few years’ time and be treated like a colony by Germany?
In the course of the rise and fall of nations, internal and external pressures work in tandem – and this is no different in the case of early 21st century Greece.
Still, most of Greece’s current problems are of its own creation, although they were truly intensified as a result of its entry into a monetary union in which it was not fit to compete.
Paternalistic political culture
Greece’s paternalistic political culture and thoroughly corrupt public institutions have hindered sustainable economic growth and blocked the changes and adjustments that all societies need to make in the contemporary world in order not to remain static and backward-looking.
When it joined the euro, Greece’s political elite took advantage of the cheap borrowing costs and engaged in reckless spending, pushing debt and deficits to unsustainable levels.
Greece’s economic growth of the last decade was spurred on by bubbles virtually all across the economy. Of course, it was all done with the help of highly irresponsible European leaders and predatory financial institutions.
Indeed, how could anyone lend hundreds of billions of euros to a country that was already posting the highest debt-to-GDP level in all of Europe, had a political regime that was notoriously corrupt, and lacked structures and processes of transparency, democratic accountability, and openness?
| When it joined the euro, Greece’s political elite took advantage of the cheap borrowing costs and engaged in reckless spending, pushing debt and deficits to unsustainable levels. |
Hardly surprising, therefore, the Greek debt crisis was the only real fiscal crisis in all of the eurozone as the calamities that befell the other peripheral member states (Ireland, Portugal, Spain, and Cyprus) were caused by their private banking sector.
The crisis in the rest of the eurozone was a typical banking and financial crisis precipitated by the practises of predatory capitalism that the European Union had fully adopted in the course of the last two decades.
The bailout package that was put together for Greece in May 2010 by the so-called “troika” of the European Commission, International Monetary Fund, and European Central Bank was designed primarily in order to rescue Europe’s banks and prevent the break-up of the eurozone.
Punishing the Greek people
Not only was the bailout package not meant to rescue the Greek economy, but it’s actual intention was to punish the Greek people for bringing the eurozone to the brink of collapse.
Indeed, the policy measures imposed on Greece secured repayment of the loans and thus kept the country from defaulting, but wiped 20 percent off the national output, caused the unemployment rate to soar to stratospheric levels (between 27-26 percent), and created a man-made humanitarian crisis.
All Greek governments up to early 2015 went along willingly with the destruction of the country as they were politically and ideologically committed to the vision of a neoliberal eurozone.
However, after five years of hardships, the Greek people voted into power the Coalition of the Radical Left (Syriza), which stood against austerity and the bailout terms.
Syriza’s rise to power came with a clear mandate to end austerity, secure a debt write-off, and address the humanitarian crisis.
Four months later, Syriza has not moved an inch closer to realising any of the above goals partly because it lacks a clear strategic vision on how to do so, but mainly because of the determination of Greece’s lenders not to allow the Syriza-led government to challenge austerity and the terms of the bailout package.
Eurozone’s economic dogma
Eurozone has made austerity its official economic dogma and the key actors in it (mainly Germany) want to make sure that grassroot challenges to austerity do not spread like wildfire to the rest of the euro area, although the outcome of the local elections in Spain that were held on May 24, as well as the size of recent street demonstrations in Portugal and Italy, reveal that the Greek “anti-austerity” wave is spreading throughout southern Europe.
 |
| Greek Prime Minister Alexis Tsipras at a meeting at the finance ministry in Athens, Greece [REUTERS] |
Hence, eurozone leaders have blocked the release of over 7 billion euros ($7.6bn) of bailout funds for Greece, causing a huge liquidity crisis, in an attempt to force the Syriza-led government to accept a humiliating agreement.
But time is running out. Greece is now bust and, as the interior minister announced a few days ago, unable to make payments in June to the IMF.
The above statement reveals the truth about the government’s financial position, but also seeks to add a new twist to the standoff between Greece and its creditors.
To be sure, this tactic was reinforced only yesterday with a statement by the Greek finance minister himself, who said that “without an agreement, Greece will not make a payment to the IMF”.
Indeed, an agreement needs to be reached by early June, or both Greece and the eurozone are headed for uncharted waters.
Yet the German side appears unwilling to give ground, although Syriza has already made major compromises on German demands for economic reform, including the privatisation of many assets still left under state control, a “compromise” that does not sit well with the very radical elements inside Syriza.
Indeed, at this point in the game, one wonders if Germany, in particular, would still like to see Greece remain in the euro.
A manageable Grexit
On the other hand, there are many inside Syriza, including influential ministers and MPs, who look forward to an exit from the eurozone. Moreover, they seem to believe, as several of them proclaimed at the party’s latest central committee meeting held just this past weekend, that a “Grexit” is quite manageable.
Maybe they are right, or they can turn out to be complete wrong, especially if they fail to provide a vision and chart a strategy for transforming Greece’s public institutions, which is key to reviving the economy and securing a sustainable future outside the euro.
Without radically reforming Greece’s public institutions and its political culture, an exit from the eurozone might be a drive into the wilderness.
Ironically, the glory of ancient Greece was all due to the magnificence of its public institutions and its exceptional cultural and political features, which included citizen-centred forms of governance and a deep sense of civic virtue.
No doubt, Byron was fully aware of all that when he wrote his famous poem contrasting ancient Greece and the Greece he had observed in his travels.
As a well-read man, he must have been fully aware that specific institutions affect social choices and help promote economic and cultural growth.
If only contemporary Greece had political leaders with Byron’s sense of the role of public institutions. Then perhaps an exit from the euro might not seem like a drive into the wilderness.
NEW YORK — When the euro crisis began a half-decade ago, Keynesian economists predicted that the austerity that was being imposed on Greece and the other crisis countries would fail. It would stifle growth and increase unemployment — and even fail to decrease the debt-to-GDP ratio. Others — in the European Commission, the European Central Bank, and a few universities — talked of expansionary contractions. But even the International Monetary Fund argued that contractions, such as cutbacks in government spending, were just that – contractionary.
We hardly needed another test. Austerity had failed repeatedly, from its early use under U.S. President Herbert Hoover, which turned the stock-market crash into the Great Depression, to the IMF “programs” imposed on East Asia and Latin America in recent decades. And yet when Greece got into trouble, it was tried again.
Greece largely succeeded in following the dictate set by the “troika” (the European Commission the ECB, and the IMF): it converted a primary budget deficit into a primary surplus. But the contraction in government spending has been predictably devastating: 25 percent unemployment, a 22 percent fall in GDP since 2009, and a 35 percent increase in the debt-to-GDP ratio. And now, with the anti-austerity Syriza party’s overwhelming election victory, Greek voters have declared that they have had enough.
So, what is to be done? First, let us be clear: Greece could be blamed for its troubles if it were the only country where the troika’s medicine failed miserably. But Spain had a surplus and a low debt ratio before the crisis, and it, too, is in depression. What is needed is not structural reform within Greece and Spain so much as structural reform of the eurozone’s design and a fundamental rethinking of the policy frameworks that have resulted in the monetary union’s spectacularly bad performance.
Greece has also once again reminded us of how badly the world needs a debt-restructuring framework. Excessive debt caused not only the 2008 crisis, but also the East Asia crisis in the 1990s and the Latin American crisis in the 1980s. It continues to cause untold suffering in the U.S., where millions of homeowners have lost their homes, and is now threatening millions more in Poland and elsewhere who took out loans in Swiss francs.
Given the amount of distress brought about by excessive debt, one might well ask why individuals and countries have repeatedly put themselves into this situation. After all, such debts are contracts — that is, voluntary agreements — so creditors are just as responsible for them as debtors. In fact, creditors arguably are more responsible: typically, they are sophisticated financial institutions, whereas borrowers frequently are far less attuned to market vicissitudes and the risks associated with different contractual arrangements. Indeed, we know that U.S. banks actually preyed on their borrowers, taking advantage of their lack of financial sophistication.
Every (advanced) country has realized that making capitalism work requires giving individuals a fresh start. The debtors’ prisons of the 19th century were a failure — inhumane and not exactly helping to ensure repayment. What did help was to provide better incentives for good lending, by making creditors more responsible for the consequences of their decisions.
At the international level, we have not yet created an orderly process for giving countries a fresh start. Since even before the 2008 crisis, the United Nations, with the support of almost all of the developing and emerging countries, has been seeking to create such a framework. But the U.S. has been adamantly opposed; perhaps it wants to reinstitute debtor prisons for over indebted countries’ officials (if so, space may be opening up at Guantánamo Bay).
The idea of bringing back debtors’ prisons may seem far-fetched, but it resonates with current talk of moral hazard and accountability. There is a fear that if Greece is allowed to restructure its debt, it will simply get itself into trouble again, as will others.
This is sheer nonsense. Does anyone in their right mind think that any country would willingly put itself through what Greece has gone through, just to get a free ride from its creditors? If there is a moral hazard, it is on the part of the lenders — especially in the private sector — who have been bailed out repeatedly. If Europe has allowed these debts to move from the private sector to the public sector — a well-established pattern over the past half-century — it is Europe, not Greece, that should bear the consequences. Indeed, Greece’s current plight, including the massive run-up in the debt ratio, is largely the fault of the misguided troika programs foisted on it.
So it is not debt restructuring, but its absence, that is “immoral.” There is nothing particularly special about the dilemmas that Greece faces today; many countries have been in the same position. What makes Greece’s problems more difficult to address is the structure of the eurozone: monetary union implies that member states cannot devalue their way out of trouble, yet the modicum of European solidarity that must accompany this loss of policy flexibility simply is not there.
Seventy years ago, at the end of World II, the Allies recognized that Germany must be given a fresh start. They understood that Hitler’s rise had much to do with the unemployment (not the inflation) that resulted from imposing more debt on Germany at the end of World War I. The Allies did not take into account the foolishness with which the debts had been accumulated or talk about the costs that Germany had imposed on others. Instead, they not only forgave the debts; they actually provided aid, and the Allied troops stationed in Germany provided a further fiscal stimulus.
When companies go bankrupt, a debt-equity swap is a fair and efficient solution. The analogous approach for Greece is to convert its current bonds into GDP-linked bonds. If Greece does well, its creditors will receive more of their money; if it does not, they will get less. Both sides would then have a powerful incentive to pursue pro-growth policies.
Seldom do democratic elections give as clear a message as that in Greece. If Europe says no to Greek voters’ demand for a change of course, it is saying that democracy is of no importance, at least when it comes to economics. Why not just shut down democracy, as Newfoundland effectively did when it entered into receivership before World War II?
One hopes that those who understand the economics of debt and austerity, and who believe in democracy and humane values, will prevail. Whether they will remains to be seen.
Guest blogger Peter Martin offers a common sense solution to the new left wing Greek government’s ‘debt crisis’.
Peter Martin is not in anyway associated with, or should be mistaken for, the columnist of the same name who writes for Fairfax.
If debts cannot be repaid they will not be repaid. Debts, in the commercial world, usually end up being settled. If they aren’t settled it is nearly always because debtors cannot pay rather than because they have chosen not to pay. There is a well recognised procedure, in civil law, recognising this truism, which can end up in the bankruptcy of the debtor if a suitable settlement with creditors cannot be satisfactorily negotiated.
Bankrupting a country like Greece when it gets into financial difficulty, however, is not a political option. Unless we want to start another war between Greece and Germany that is! So what are the options? Apart from carrying on, in both senses of the term, in the the present irrational manner there is only one. If Germany (plus other countries such as Holland who also own Greek debt) requires Greece to repay its debts, Germany has to recognise that Greece has to pay in something other than euros, at least not directly, as it clearly does not have anywhere near enough and has fewer now after the application of the supposed economic remedy (punishment?) by the troika than it had previously.
Therefore, it has to pay in real goods and services: Tourism. Olives. Feta cheese. Ouzo. Shipping. Whatever Greece makes, does and sells, Germany needs to buy to enable the debt to be settled. And it needs to buy more from Greece than it sells to Greece. That way Greece ends up with the euros, which pays the Greeks for growing the olives, running the tourist hotels, making the cheese etc . This enables the Greek economy to provide jobs for the unemployed, improve its Government’s tax revenue base, grow its economy, and also enables the Greeks to service, and eventually settle, their German debts.
The same naturally goes for Spain, Italy and even France. In other words, German debts get repaid when, and only when, Germany decides to accept real goods and services instead of euros. This in turn means that Germany has to run an economy more along the lines of the UK and the USA economies and import more goods and services than it exports.
Barely a week after receiving a mandate from parliamentary electors to combat the Brussels-driven austerity that has wrecked Greece’s economy and afflicted its population for half a decade, Syriza Finance Minister Yanis Varoufakis confirmed his party’s intentions to fight EU oppression by saying he would not negotiate with representatives of Greece’s “hated troika of lenders.”
“We respect institutions but we don’t plan to cooperate with that committee,” Varoufakis said, referring to the auditors who review Greece’s accounting on behalf of the European Commission, the European Central Bank and the International Monetary Fund. “Our first action as a government will not be to reject the rationale of questioning this program through a request to extend it.”
Varoufakis, an academic with the University of Athens, had just emerged from a talk in Athens on Friday with Jeroen Dijsselbloem, head of the Eurogroup of EU finance ministers. In a visibly tense press conference alongside Dijsselbloem, Varoufakis added that Greece would not seek an extension to its $270 billion bailout.
“This platform enabled us to win the confidence of the Greek people,” he said.
As The Guardian noted in its report on the conference, Greece has lost more than a quarter of its GDP as a result of budget cuts and tax increases “enforced at the behest of creditors.”
Varoufakis and Greece’s new prime minister, Alexis Tsipras, said their government would deal only with individual institutions and ministers within the EU.
Varoufakis made headlines just before the election when he promised to “destroy the basis upon which they have built, for decade after decade, a system, a network that viciously sucks the energy and economic power from everybody else in society.” He made the statement in replying to a journalist who asked: “What will you do to [Greece’s] oligarchy, concretely?”
For standing his ground against intransigent EU officials indifferent to the suffering of their fellow Europeans, we honor Yanis Varoufakis as our Truthdigger of the Week.
Opinion
Supporters of Germany’s left-wing Die Linke party, hold placards as they show their support to Alexis Tsipras, leader of Syriza left-wing party after his speech to supporters in central Athens, late Sunday, Jan. 25, 2015. The placard, center, reads in German: ‘This is really a goodnight Mrs Merkel’. (Lefteris Pitarakis/AP)
If you made a list of countries you hope have learned from their past hundred years of mistakes, Germany would have to be at the top. Happily, the staunch opposition to a nativist fringe that the nation’s government and citizenry have shown in recent weeks makes it clear, again, that Germany understands the costs of bigotry and the virtues of tolerance.
Unhappily, it has not learned the costs of a mad adherence to fiscal orthodoxy, despite the fact that its prosperity is rooted in the decision of its World War II adversaries to allow West Germany’s postwar government to write off half of its debts.
Harold Meyerson writes a weekly political column that appears on Thursdays and contributes to the PostPartisan blog. View Archive
Indeed, the policies that Angela Merkel’s government have inflicted on the nations of Southern Europe could not be more different from those that European leaders and the United States devised in the early 1950s to enable West Germany to rebuild its damaged economy. Since the crash of 2008, Germany, as Europe’s dominant economy and leading creditor, has compelled Mediterranean Europe, and Greece in particular, to sack their own economies to repay their debts.
Germany’s insistence has reduced Greece to a condition like that of the United States at the bottom of the Great Depression. Unemployment has soared to 25 percent, and youth unemployment to more than 50 percent ; the economy has shrunk by 26 percent and consumption by 40 percent. Debt has risen to 175 percent of the nation’s gross domestic product. And the funds from the loans that Germany and other nations have extended to Greece have gone almost entirely either to cover interest payments or repay past loans; only 11 percent has actually gone to Greece’s government. Stuck on a treadmill of debt repayment and anemic economic activity, Greece, as the Financial Times noted, has been reduced to a “quasi-slave economy” run “purely for the benefit of foreign creditors.”
Not surprisingly, when Greek voters went to the polls Sunday, they elected a new government that is demanding a renegotiation of its debt. German and European Union officials have responded with adamant opposition to any such changes.
Fortunately for Germany, its own creditors took quite a different stance after World War II. In the London Debt Agreement of 1953, the 20 nations — including Greece — that had loaned money to Germany during the pre-Nazi Weimar Republic and in the years since 1945 agreed to reduce West Germany’s debts by half. Moreover, they agreed that its repayments could not come out of the government’s spending but only and explicitly from export income. They further agreed to undervalue the German mark, so that German export income could grow. By the consent of all parties, the London Agreement, and subsequent modifications, were crafted in proceedings that made West Germany an equal party to its creditors: It could, and sometimes did, reject the creditors’ terms and insist on new negotiations.
The United States was particularly insistent on making the terms of West Germany’s repayments as lenient as possible. It needed the nation to be a strong ally in the Cold War. Besides, West Germany’s government, headed by Christian Democrat Konrad Adenauer, was (presumably) Nazi-free. To further punish Germany, its onetime mortal enemies concluded, was strategically — and, just maybe, morally — unwise.
No such scruples have informed Germany’s current policies toward Greece. As a member of the euro zone, Greece cannot undervalue its currency, and rather than enabling Greece to increase its exports, Germany has done everything possible to increase its own trade balance with Greece and its European neighbors. Far from rebuilding the economies of Southern Europe, Germany pillaged them in the name of fiscal rectitude.
But the considerations that informed Germany’s creditors six decades ago are just as pertinent today. Strategically and economically, it would be a disaster for Germany if Greece were compelled to repudiate its debts and leave the euro zone, as such a move would threaten the zone’s continued existence. The new Greek government represents at least as clean a break with Greece’s previous mis-rulers as the Adenauer government did with Hitler’s. Its early appointments signal a novel development in Greek governance: a fight against the corruption and crony capitalism that have long corroded the nation’s economy.
Why can’t Germany apply the lessons of its own past to today’s economic challenge? As Jurgen Kaiser noted in a brilliant paper for the think tank of Germany’s Social Democrats, “little knowledge about Germany’s debt relief is to be found among the broader public in Germany.”
The world will be a better place when Germans know their history — all of it.
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The Post’s View: The German-Greek standoff over the debt crisis
Yanis Varoufakis is tipped to become finance minister of what may become Greece’s leading party after legislative elections Sunday. He tells Britain’s Channel 4 what Syriza will do if it takes power.
Channel 4 economics editor Paul Mason asks Varoufakis, who teaches economics at the University of Athens, “what will you do to [Greece’s] oligarchy, concretely?”
Varoufakis responds, “We are going to destroy the basis upon which they have built, for decade after decade, a system, a network that viciously sucks of the energy and economic power from everybody else in society.”
When Mason notes Varoufakis knows what happened the “last time somebody tried to take power from the Greek oligarchy,” Varoufakis replies that “the good fight has to be fought independently of costs.”
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—Posted by Alexander Reed Kelly.
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