“Don’t go gently into the night; rage, rage against the dying of the light”, wrote the new Greek finance minister, the academic economist, Yanis Varoufakis, quoting the poet Dylan Thomas.
Greece has overwhelmingly voted for an end to austerity. After being hammered brutally by the IMF, the EU and their European partners to stick to their budget cutting promises and “structural” reforms the Greeks have finally decided to throw off the yoke of the oppressive financial and economic regime by electing the left-wing Alexis Tzipras and the Syriza government, which had been in complete political oblivion just a few years ago before the crisis blew up. No, the Greeks are not natural communists, but they do listen to their interests, once they are so recklessly driven into a corner. And the new government is in part delivering on some of its promises by canceling the next austerity moves, stopping further privatization, rehiring government workers that were fired, reinstating the minimum wage (which was hopelessly slashed in the previous administration), and by throwing out the strict debt repayment schedule. Now it is time to negotiate with their foreign creditors, and hopefully seek an amicable solution with them.
By following austerity policies so faithfully under the previous conservative administration (Antonis Samaras) the country plunged itself into the largest economic depression it has since in a long time. Wages and living standards were reduced by 30% in short order, and the economy tanked. The European partners say that Greece has taken out too much debt and has to bear the full cost of fiscal adjustment. Every party has to come to an end, we are being told. Austrian and German taxpayers are furious at their governments for rewarding taxpayer bailouts to those “lazy” Greeks.
Is that all that we have to know about the crisis? Let us step back for a moment. Most observers will agree that one of the root causes of the crisis is that the Greeks were members of the eurozone, and either never should have been part of it, or if it were part of it, it had to accept much more restrictive fiscal policies. But there was no mechanism in the EU, which could guarantee such restrictive fiscal policies. I am by the way a supporter of a EU fiscal union. We should keep in mind that with the accession into the eurozone one of the two major policy tools for the national governments, namely monetary policy, is surrendered to the larger political entity, the European Central Bank. That leaves countries with only fiscal policies to adjust to the economic needs of the country.
It is true that the Greek government then went out to borrow a lot of money from other European countries, especially from Germany, France and other countries up north. But one should not forget that the loans were pretty much given to them without any lender restrictions. The common currency had given the banks the green light to lend enormous sums of money without the currency devaluation threat, which could reduce the debt pile significantly (if the money had been lent in the drachma, if it is in D-mark, then the story is less favorable for the Greeks). The Greeks were able to take out the loans due to low-interest policies, and with that German money they bought… you guessed it, German goods. The story of the EU is a complete tragedy: Greece had price and wage growth that was far above productivity, while Germany had price and wage growth far below productivity. If there was no trade, there would have been adjustment at some point, because the former would have run out of money, and the latter would see its economy falter due to lack of consumption growth. But the situation was maintained by having the Germans produce for export, and the Greeks importing those goods with German money. Germany thus produced 2 trillion euros in export surpluses over the last 15 years, and is defending that with tooth and nail. No wonder this system had to implode.
Once the financial crisis of 2008 hit, the Greeks could no longer hide their debts, and the speculators quickly tried to sell off the Greek bonds. But that makes the situation worse, because now the interest on the Greek bonds increase dramatically, and a recession-battered economy now had to go into deeper debt while at the same time not being able to take counter-cyclical steps to pull the economy out of recession.
The German government and others now realized that their banks were in big trouble, because if the Greeks stopped paying up, then the German banks would collapse too. The Europeans then got the idea to organize a bailout for the banks, which had been sold as a bailout for the Greeks. But it was NOT a bailout for the Greeks, but a bailout for the banks through the backdoor. The German tax money was funneled via the Greek government back to the foreign creditor banks in the form of debt service, and only a small portion (10% or so) was actually used to run other current government expenses. Blaming the Greek people or their government is completely overblown, and at the end the quiet bankers are laughing their way to the bank (what an incestuous description!). Now that the Greeks are negotiating with their new foreign creditors, mainly IMF and EU, the private banks have mostly disposed themselves of their liability. Any losses on defaulted loans would fall on EU taxpayers.
But default is now the only option. Let us examine why. Greek debt now stands at 180% of GDP, and is now unsustainable. The creditors say that the Greeks have to cut their debt nonetheless. But how? By austerity measures. Raising taxes on working people and lowering government services to them. The government could have also attacked the assets of the wealthy, but they were clever enough to run away with their assets and hide them from the Bermudas to Switzerland, and the corrupt tax authorities let them get away with it, so they attached the taxes to working people, mostly in the form of sales tax, property tax and income tax. These are the easy targets. Working people can’t run away and hide their assets quite as easily as the rich. So there is a lot of tax evasion in Greece, no doubt, and the new Syriza government wants to fight that.
But let us think about the implications of austerity policies. The implication is to remove demand from the economy. You have fewer people employed (25% unemployment rate and 60% youth unemployment), those fewer people pay more taxes and buy fewer products, their wages are reduced to almost nothing. You have a humanitarian crisis in the form of rising emigration, rising suicide rates, more diseases, people becoming homeless and picking up food from the trash can, in short, a humanitarian disaster in the midst of the richest continent on the planet. Now what happens when the economy shrinks? Your debt burden becomes heavier, not lighter. With austerity the income with which to repay the debt shrinks. The debt to GDP ratio itself goes up when the denominator (GDP) decreases. It’s math! So working people in Greece are screwed with the stupid carrot that at some distant point in the future their deprivation will have paid off with a reduction of the debt. Yes, an angel that looks like the devil is going to come down and save them! I wish somebody could save the Greeks from these nonsense neoliberal preachers! Syriza, anybody? The Greeks are also being told the nonsense that with the “structural” reforms (basically cutting wages and prices and destroying labor unions) they are going to export their way out of the mess. But where are they going to export their products? Their current account deficit is much lower than it used to be, but it is hard to imagine where the big buyers are going to come from, because the Germans are certainly not doing it. The overwhelming majority of the economy is still driven by domestic consumer purchases of ordinary people.
I should tell a tangential story as anecdote here: in the 1980s, Ceaucescu, the president of Romania, decided to pay off the entire debt of his country by exporting all of the food surpluses (and even some essentials) from the country and importing as little as possible. So the Romanians were deprived of many goods and the shelves were often empty. By the late-1980s all of the debt was paid off, but he did not change policies. By that time Gorbachev’s perestroika and glasnost was making its way through the whole of Eastern Europe, and the Romanian people seized the moment to get rid of Ceausescu. Now, it is hard to tell whether he would have been able to remain in power had he not done austerity on his people, but he might have persisted more amicably (he was shot in 1989 in a show trial) had he not done it.
Austerity is a fraud, and can neither serve the interests of the people of Greece nor of any other European country. If people in other countries think they can be spared this treatment they should be forewarned. The German intransigence with regard to a debt haircut is particularly bewildering for historical reasons: Germany had seen its debt partially forgiven in 1953 by the allied powers, because they were in a bad economic situation after the war. This time the allied powers were smarter than after World War I, and they allowed the haircut in order to allow the Germans to grow and develop their economy. On another note it were the Germans that led the tragic example of austerity during the 1930s between the Great Depression and Hitler’s accession to power. The chancellor, Heinrich Bruning, decided to signal “credibility” to the creditors by cutting the federal budget at a time of mass unemployment, shrinking tax revenues and growing poverty. The Nazis received less than 5% of the vote before the crisis. By 1932, their voter support had grown to one-third of the total vote. The communists also become stronger, but could not capitalize as well on mass discontent as the Nazis could. Hitler reversed the disastrous Great Depression with rearmament policies in clear violation of the Versailles treaty for which he could care less (and he plundered middle class and wealthy Jews, in part, to pay for it). This is not to defend Hitler’s policies in any way. I happen to believe that military spending is a very bad way to rev up an economy, but it is better to spend money than to save it during bad times. This is the logic that must not be forgotten.
In a neoliberal world, the lessons don’t seem to be learned. The same nonsense policies to remain in good standing with creditors, whose foolish speculative investments have in part contributed to the crisis, are going to produce more debt, political radicalization, extremism, violence, discontent and in some cases even war. The lessons will have to be relearned, and the high priest oligarchs will have no choice but to make concessions if even they want to survive in a building, whose walls and foundations have become shaky, and threatening to engulf all of us below in a huge pile of smothering rubble. In the mean time, let us cheer on the Syriza party, and hope that they can fight the austerity mantra with better ideas. Greece should rage, rage against the dying of the light!