Roots, Policies, Outlook and Alternatives
7 October 2011
Marica Frangakis, Nicos Poulantzas Institute, Athens
Introduction
Every story needs a narrative, an explanation of why things
happened the way they did. In such a narrative lie the answers of
how to avoid/correct similar developments in the future and how to
propagate positive ones. Understandably, there may be different
narratives to any particular case, depending on one’s standpoint, ie,
on one’s individual and especially group or class interests, the
information available, etc.
The narrative of the Greek public debt crisis is on many levels
-domestic, the particular characteristics of Greek capitalism;
European, the narrow basis of European integration and of the
monetary union; global, the dominant role of finance, shifting its
share of responsibility for the crisis to ordinary taxpayers. We shall
explore each of these levels in the first part of our presentation.
The policies implemented in Greece, ostensibly in the interest
of its people, are a test-case for the deepening of the neoliberal
paradigm in Europe, favouring finance and more generally the
privileged social classes. For example, the EU/IMF package is
openly supporting privatization as a means of dealing with the
public debt crisis, thus violating the Treaty’s neutrality towards
ownership. Further, the setting up of a Task Force to provide
technical assistance to the Greek government, quarterly reporting to
the European Commission President and to the Commissioner for
Economic Affairs and by-passing the Greek government
compromises Greece’s political sovereignty. The policies
implemented in Greece at present will be reviewed in the second
part of our presentation.
Deflation has already taken hold of the Greek economy, while
the prospect of a long-drawn depression is more real than not.
Social discontent is turning into unrest, while society is gripped by
the fear that the light at the end of the tunnel is that of the oncoming train! The government is mobilising ever increasing
numbers of police, in order to quell the protests in the streets. So,
what is to be done?
Desperate as the situation appears, we need to bear in mind
that there is no shortage of alternative proposals. It is the political
will to table and implement them that is in short supply. It is at this
point that social mobilisations may bear on the situation. The
broader, more informed, better coordinated and organised, the more
likely they are to halt and even reverse the tide of events we are
faced with. The outlook and possible alternatives will be discussed
in the third part of our presentation.
1. The Greek narrative - Roots of the crisis
The orthodox account of Greece’s public debt crisis is one of
fiscal profligacy, a country living beyond its means. This is not
surprising, since Greece’s public deficit and debt, as well as its
current account deficit have been persistently high in the past ten
years. However, it is a superficial reading of the crisis, to the extent
that it does not take into account the process that has led Greece to
its present state. It is only through understanding this process, that
one can attempt to change it.
Domestic factors
By ‘domestic’ are meant the particular features of the
capitalist formation in Greece, as it developed in the past halfcentury, which help explain the present state of its public finances.
In the early 1950s, the Greek economy was in tatters, following a
devastating WWII and an equally destructive civil war. The period
1950-1973 was dominated by the authoritarian Right (1950-1967)
and the dictatorship (1967-1973). During this period, economic
policy, which had little concern for a social agenda, aimed at
‘growth at any cost’, on the basis of a particular type of ‘social
compromise’, which tolerated various tax digressions, such as
favourable tax arrangements for the industrial sector, exemption of
farmers from income tax, tax evasion by small businesses and
professionals, etc. So much so, that there emerged the idea of ‘legal
tax evasion’, which holds to this date (Stathakis, 2010).
The beginnings of the welfare state date back to the 1980s,
during which a number of former national champions were
nationalised, with the state taking over their liabilities. The
problems facing the economy were compounded by sluggish
growth and high inflation, resulting in a severe worsening of public
finances.
Joining the eurozone was the strategic goal of the 1990s and of
the 2000s. The productive sectors - manufacturing and agriculturefell further behind, while privatization and market liberalisation
helped deepen the financialisation of the economy. While the state
of public finances worsened, these were ‘massaged’ through the
use of derivatives and with the help of such revered financial
institutions, as Goldman Sachs, a point we shall come back to
shortly. Further, the inflow of portfolio investment made up much
of the shortfall in the current account.
Throughout the sixty year period 1950-2010, the question of
boosting state finances through the elimination of tax evasion
remained outside the political agenda. This is a salient feature of
the chronic fiscal problems of Greece. The fact that it is not
bordered upon even today, is indicative of the prevailing group
interests in Greek society. For example, it is estimated that the
richest 20% of the population pay the least amount of income tax!
Other features of the profile of the Greek economy and its
fiscal basis can also be explained by taking a longer-term view of
the development of capitalism. For example, the existence of
‘closed professions’ and high public sector employment denote the
attempts of capitalists to tie in the interests of the middle class and
sections of the working class to their own (Tsakalotos, 2010). In
this sense, the resulting social and economic configuration is a
component of contemporary Greece, rather than just the symptom
of a ‘clientelistic state’.
Only radical social and economic transformation, starting with
the tax system and public administration, can make a lasting
impact. The EU/IMF package does not address the social nature of
Greece’s fiscal problems, while the deepening crisis makes
institutional change more difficult.
European factors
It has been said that Greece faces a triple constraint (a) the
inability to devalue its currency; (b) global downturn and (c) a
powerful partner determined to run a current account surplus
(Papadimitriou et al, 2010).
Indeed, in adopting the single currency, the eurozone members
solved the problem of exchangerate speculation. However, the lack
of a government banker - ie, a central bank that can stabilise the
sovereign bond market through open market operations, in the way
the Federal Reserve and other central banks are able to do- exposed
them to speculation in the bond market, to the extent that the ECB
is forbidden by the Treaty from acting in that capacity.
At the same time, the fiscal arrangements of the monetary
union rely on discipline and peer pressure, while the Union budget
is minimal (less than 1% of EU GDP), excluding by definition the
notion of a transfer union. Thus countries like Greece stand
defenceless at a time of crisis.
The increase in the public deficit of Greece is largely
endogenous. Ie, it is mainly the result of the global and European
recession and the coming into play of the automatic stabilisers.
Thus a chronically high public deficit and debt shot upwards in
2009-2010. Financial engineering exacerbated the situation.
The third constraint facing Greece, as well as other indebted
eurozone countries, is the growing divergence in the performance
of different countries. In particular, a persistent and growing trade
imbalance between Germany and certain other mainly N. European
countries, on the one hand, and most S. European countries,
amongst which Greece, on the other, is indicative of the
competitiveness problems faced by the latter even in normal times,
let alone at a time of crisis. The macroeconomic stance chosen by a
major economy in the eurozone, such as Germany, undermines any
attempt at convergence.
Thus, although the Greeks work longer hours than the
Germans on an annual basis, have one of the lowest per capita
incomes in Europe, a very unequal distribution of income and a
high level of poverty, especially among the working poor (OECD,
2010), they are less competitive than their German counterparts,
because Germany is pursuing a low-wage growth strategy, which is
consistent with its export-led model. On a long-term basis, such
divergences are not compatible within a monetary union, unless the
difference in the current account balance between surplus and
deficit member states is compensated for by transfers. This
however is precluded by design.
Overall, the restrictive institutional arrangements of the
European Monetary Union and the diverging wage policies of its
member states account not only for much of the predicament
Greece finds itself in, but also for its inability to overcome it.
Global factors
As mentioned above, much of the increase in the Greek public
debt was originally triggered by the global downturn. In addition,
global finance played a significant part in exacerbating the crisis in
its different stages.
Starting at the beginning, for nearly fifteen years, Goldman
Sachs created currency swaps that enabled Greek government debt
issued in dollars and yen to be swapped for euro-denominated
bonds that would be paid back at a later date. The bond maturities
range between 10-15 years. GS received a hefty commission and
sold the swaps to a Greek bank in 2005. The Greek government
kept its eurozone partners happy and the state of the Greek public
finances was expertly and legally disguised!
As Greece’s financial condition worsened in 2009, GS, JP
Morgan and certain other banks backed an obscure company - the
Markit Group of London- to introduce a new index - the iTraxx
SovX Western Europe- made up of the 15 most heavily traded
credit-default swaps in Europe and covering troubled economies
such as that of Greece. This enables market players to bet on
whether Greece, amongst others, will default or not. Trading in
such swaps drives up the cost of insuring Greek sovereign debt and
in turn what Athens has to pay to borrow funds. Hence the
phenomenon of banks betting Greece will default on debt they
helped hide!
As mentioned above, the monetary arrangements of the
eurozone leave its members vulnerable to bond market speculation.
As the Greek crisis demonstrated, such countries can be held
hostage by financial markets and credit rating agencies alike. The
multiple downgrades of Greek sovereign bonds are illustrative in
this respect. In the first half of 2011 alone, the three big CRAs
downgraded them 7 times! Not surprisingly, by July 2011, the
spreads on these bonds exploded, as did the CDS.
Overall, global finance affected the emergence and the
development of the Greek public debt crisis both directly and
indirectly. The particular instances mentioned above are examples
of direct involvement. Indirectly, global finance has been
instrumental in fostering the ¡¥profligacy of the Greeks’ narrative,
in an attempt to divert attention from its own part in the crisis and
to secure fresh bail-out funds. Furthermore, as pointed out by
Walden Bello, by throwing the spotlight on the high and rising
government spending as the key problem of the economy
worldwide, global finance is trying to deflect the pressures for
tighter financial regulation demanded by citizens and governments
since the start of the global crisis.
2. EU/IMF bail-outs -The cure killing the patient?
The run-up to the first bail-out
The saga of the Greek public debt crisis began in October
2009, when the newly elected socialist government announced that
the public deficit for 2009 would reach 12.5% of GDP, instead of
3.7%, as projected in that year¡¦s budget. The 10-year bond spread
(over the German bond), which was equal to 134 b.p. on 22
October 2010, started rising.
In early 2010, Greece announced a series of austerity
measures, which were ‘welcomed’ by the European Council (at its
meeting of 25 March 2010). However, the 10-year bond spread
reached 586 bp on 22 April. On 23 April 2010, the Greek
government formally applied for financial assistance from the
eurozone and the IMF. This was agreed in early May 2010, while
the ECB announced that it will accept Greek government bonds as
collateral irrespective of their rating.
Even so, by 7 May, the 10-year bond spread reached 1038 bp,
around which it hovered throughout 2010 and which it has by now
exceeded.
The 2010 bail-out
This amounts to Euro 110 bn, of which Euro 80 bn are
intergovernmental loans pledged by the eurozone countries and
Euro 30 bn by the IMF. The projected disbursement of the loans is
designed to meet the financing needs of Greece up to the first half
of 2013. The loans carry a 3.5% interest rate and have maturities of
15-30 years, including a grace period of 10 years. The bail-out
package is strictly conditional on the implementation of severe
austerity measures, as well as of extensive liberalisation and
privatization reforms.
More specifically, the austerity measures are based more on
expenditure cuts (over 60% of the reduction of the deficit) than on
tax increases. They are designed to reduce the public deficit from
15.4% of GDP in 2009 to 2.6% by 2014. Further, thorough-going
and detailed reforms of the pension system, of healthcare and of
education constitute explicit conditions of the bail-out package.
Progress in all of these areas is checked at regular intervals by EU
and IMF officials, determining whether whether the next tranche of
the loans will be disbursed or not. In this way, additional pressure
is exerted, leading to further austerity measures, in case of the
targets not being reached.
The bail-out fiscal projections are based on a crucial
assumption, that growth resumes not only in Greece, but also
globally. As the experience of the past year has shown, this is a
bold assumption, almost certain to fail in the short term. Greece is
already in a downward spiral of falling wages, prices and
production and rising unemployment (17% from 10% in 2009 and
expected to exceed 20% shortly), poverty and inequality. As the
Fourth Review of the ‘Economic Adjustment Programme for
Greece’ notes, the recession is deeper and longer than initially
expected. This results in the non-attainment of the bail-out fiscal
targets, which leads to new measures, taken in a near-panic by the
Greek government, perpetually chasing its own shadow!
The 2011 bail-out
This was decided in July 2011 and it marks a departure from
the previous one, insofar as it contains a clause regarding the
involvement of the banking sector, which is being asked to take on
a loss of approximately 21% of their Greek government bond
holdings. The actual form and rate of participation of the banks has
not yet been finalised.
A cornerstone of both bail-outs is the fast-track privatization
of the state’s holdings throughout the economy. In spite of the
EU¡¦s presumed neutrality towards ownership (art. 345 of the
Treaty), the European Commission takes a clear position in favour
of privatization, as a means of reducing the public debt, as well as
of promoting economic activity. Furthermore, the privatization
process is to be monitored by an independent board, following the
example of the TREUHAND agency, which was responsible for
the privatization of the E. German economy, after unification.
Obviously, it is considered to have been successful, even though
2,5 million jobs were lost in the process, while the whole exercise
cost more than DM 300 billion, as compared with the privatization
revenues, which did not exceed DM 60 billion.
Overall, the EU/IMF bail-outs fail to recognise the nature of
the Greek debt crisis, be it domestic, European or global. In this
way, they overlook not only the deeper aspects of the shortcomings
of the Greek economy, but also the structural weaknesses and
inadequacies of the euro construction, as well as the role of finance.
Furthermore, the same logic and political one-sidedness is
displayed in relation not only to other indebted countries seeking
financial assistance, such as Ireland and Portugal, but also with
regard to the main policy guidelines for the eurozone as a whole.
Pursuing fiscal consolidation simultaneously across an area of 17
member states (not to mention 27!) at a time of crisis is simply
spreading ‘contagious austerity’ at the risk of provoking the
‘contagious downturn’ of the eurozone as a whole, in effect risking
its very survival (Munchau, FT, 4/9/2011).
3. Outlook and alternatives
The austerity measures and the labour market reforms carried
out in Greece are a form of internal devaluation, ie, a way of
lowering the real effective exchange rate in terms of unit labour
cost. This is a long-drawn process, with a heavy social cost, made
even heavier by the current global and European uncertainties.
Furthermore, it cannot go on for very much longer, not only
because the economy will eventually collapse, but also because, in
a society with diversified interest groups, those bearing the greatest
share of the burden will reach the limit of their capacity to do so.
Already, there are signs of political alienation and anger directed
against the two major political parties, which have alternated in
power in the post-WWII period. The extreme Right is also
registering a rise in electoral preferences.
Overall, the situation in Greece is no longer economically or
socially sustainable. The experience of the past year has
demonstrated that fiscal consolidation without growth is not
possible and that the continuation of the austerity and reform
programme of the EU/IMF in fact deepens the recession, making a
disorderly default more imminent. So, what is to be done?
The orthodox answer to this question is ‘more of the same’.
Germany’s federal minister of finance, Wolfgang Schauble,
maintains that ‘Governments in and beyond the eurozone need not
just to commit to fiscal consolidation and improved
competitiveness, they need to start delivering on these now. The
recipe is as simple, as it is hard to implement in practice: western
democracies and other countries faced with high levels of debt and
deficits need to cut expenditures, increase revenues and remove the
structural hindrances in their economies, however politically
painful’ (FT, 5/9/2011). A plain message, in clear neoliberal
language, which unfortunately cannot work at a time of crisis. But
what is the alternative?
The idea of issuing ‘eurobonds’ -ie, bonds collectively
guaranteed by the eurozone member states- has been floated by
various proponents and in a variety of forms. For example,
according to the’ blue’ bond proposal, countries would have the
right to issue blue bonds, collectively guaranteed up to 60% of their
GDP, thus significantly lowering their borrowing costs.
Another ‘eurobond’ proposal would have the ECB issue bonds
and buy up to 60% of the existing debt of the eurozone countries,
while individual countries would be responsible for their share of
the interest on the Eurobonds.
Both of these proposals could offer some relief to the current
crisis of confidence in the eurozone and help indebted countries
like Greece out of their current impasse. However, the ‘blue’ bond
proposal implies a transfer from stronger to weaker countries, in the
form of guarantees, while the’ eurobond’ proposal comes up
against the ‘ no bail-out’ clause of the Treaty and of the ECB
statute.
More proposals, not necessarily requiring the revision of the
Treaty of the Union, have also been forthcoming. For example,
Thomas Palley has proposed the establishment of a European
Public Finance Authority, that would act as a treasury for the
eurozone, in conjunction with the ECB, which in turn would assist
budget financing by managing bond interest rates, as a government
banker would normally do (Palley in FT, 31-8-2011).
All of the above proposals towards a more meaningful
financial, if not fiscal, union of the eurozone have two things in
common: (i) they require the political will to adopt and implement
them and (ii) they are medium to long-term measures. In the best of
cases, they cannot deal with the immediate issues facing Greece or
the eurozone.
Most analysts agree on the need to provide breathing space for
Greece. The continuation of austerity policies does not only
dampen aggregate demand. It also increases the real value of the
outstanding debt, which will lead to bank failures and to
bankruptcies of businesses. Hence, the need to reverse gear; ie, to
reflate the economy by promoting economic growth. Since the
private sector cannot do this, it will have to be the government.
Furthermore, there is an urgent need to restart growth in the
eurozone and in the EU more generally. Surplus countries like
Germany can boost consumer spending in co-ordination with the
rest of the eurozone. The European Investment Bank can also
contribute to reflation by financing public works. Needless to say,
such reflation should take into account environmental and climate
considerations and it should be designed so as to reduce inequality
and poverty.
Lastly, it is essential that the reform of financial regulation
policy in the EU, as well as globally, is concluded soon, after more
than two years of deliberations. The attempts by the banks and
other financial institutions to tailor the new regulations to their own
interests has to be resisted. After all, growth and stability are
prerequisites for a successful exit from the current crisis on the
national, European and global level.