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Solidarity key to avoiding a European tragedy

Posted on June 18, 2015 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

Monday 22 June 2015. Krinein is a Greek word which means 'to sift or to separate'.  It gives rise to the word 'crisis'.   Greece has always been at the heart of the European continent. Culturally, linguistically and philosophically ancient Greek civilisation has helped shape who we are as Europeans.  Like so many other countries in Europe, Greece has had a troubled history over the last century marked by wars, a bloody and prolonged civil war (1946-49), a period of military dictatorship (1967-1974) and since then a period of democracy and relative stability together with some uneven economic progress. Politically, Greece stands at an important gateway in Europe – a member of the European Union (since 1981) and of the North Atlantic Treaty Organisation (NATO) – close to the Balkans, on the receiving end of refugees from North Africa and never far from the cauldron of the Middle East.

A presently troubled Greek economy and political situation is a matter of special interest to both the United States of America and Russia where competition for spheres of influence and cooperation is evident. The current impasse in Greece concerning its public debt and the situation involving the European institutions, the International Monetary Fund and the Greek Government is threatening the very cohesion of the Eurozone and possibly the European Union itself.

Ireland stands economically exposed to the Greek situation

The risks and exposures of large countries such as Germany and others has implications for Ireland which depends so heavily on international stability in trade, investment and political stability. Globalisation and financialisation as well as the reality of the European monetary union means that even a relatively small economy such as that of Greece has the potential to have a large shock effect on the rest of Europe.  A type of contagious Lehmans impact cannot be ruled out as unlikely or impossible. This is inspite of the fact that the Greek economy in total accounts for only less than 2% of total GDP in the Euzozone area (with Ireland having a similar share).

Greece is experiencing a humanitarian crisis

A tsunami has hit Greece since 2008 with falling incomes, deep cuts in wages and pensions and a huge jump in unemployment especially among the young where the rate among young people (aged 15-24) reached 52% in 2014. The recession has been prolonged by one of the most severe fiscal consolidations undertaken in Europe in recent times.  Between 2007 and 2014 GDP declined in real terms by 2% in the Republic of Ireland, by 1% across the Eurozone as a whole, and grew by 4% in the UK. In Greece, GDP declined by 26% over the same period. This provides a crude measure of how the recession has impacted on Greeks in terms of falling incomes, contracting employment, cuts in public services and a rising number of people who are living on the edge of existence. In 2014, the estimated proportion of households not able to make end meet except with ‘great difficulty’ was 40% in Greece, 17% in the Republic of Ireland and 12% on average across the EU as a whole (Source: Eurostat online database: Code ilc_mdes09). In the case of Greece, the proportion jumped from 20% in 2008 to 40% in 2014 while in Ireland it jumped from 9% to 17% over the same period.

The Greek Orthodox Church as been active in emergency daily food distribution in cities like Athens (see report in the Guardian from 2013).  Inside the European tent and Eurozone a growing humanitarian crisis is a reality on our doorstep. Refer to Chart 1.

Between 2007 and 2014 GDP declined in real terms by 2% in Ireland (Republic of), by 1% across the Eurozone as a whole and grew by 4% in the UK. In Greece, GDP declined by 26% over the same period. This provides crude measure of how the recession has impacted on Greeks in terms of falling incomes, contracting employment, cuts in public services and a rising number of people who are living on the edge of existence. In 2014 the estimated proportion of households not able to make end meet except with ‘great difficulty’ was 40% in Greece, 17% in the Republic of Ireland and 12% on average across the EU as a whole (Source: Eurostat online database: Code ilc_mdes09 ). In the case of Greece, the proportion jumped from 20% in 2008 to 40% in 2014 while in Ireland it jumped from 9% to 17% over the same period.

Chart 1:   Poverty rates in Greece, 2008 - 2012

Poverty Rates, Greece

Source: http://bit.ly/1BuuQGL

This is the context in which a new Government was elected following the January elections this year in Greece. Parties of the centre left and centre right were tried but failed to turn the economy around under the tightening grip of externally imposed conditions of debt servitude. A corrupt and dysfunctional legal and political system in Greece has also played a major role in the current crisis. No less than the current Greek Finance minister, Yanis Varoufakis, explains it this way:

The barriers to growth in the past were an unholy alliance among oligarchic interests and political parties, scandalous procurement, clientelism, the permanently broken media, overly accommodating banks, weak tax authorities, and a weighed-down, fearful judiciary. Only the bright light of democratic transparency can remove such impediments; our government is determined to help it shine through. 

The mandate of the incoming Syriza Government was to bring a halt to this growing crisis and to begin to reverse some of the worst aspects of austerity. The new Government has very little time in which to prove its credentials to the Greek people and the world. At the same time it is under the unrelenting pressure of the European elites to continue the disastrous policies that have served to prolong this economic and social catastrophe. The eyes of Europe and the world are on Greece to see what the outcome will be. Many in Ireland see the new Government as a sign of hope and possible new beginning in Europe.

Caution needed in examining the Greek situation

It is important to look at Greece with some caution and a critical mind. Much of the information communicated to us adopts a hostile or implicitly negative view of the situation and, in particular the new Government. Lazy assumptions and popularly received ‘facts’ are adopted such as the view that Greece is mainly responsible for its own demise, the statistics were manipulated by political forces during and after its accession to the Eurozone, the country’s political and administrative system are hopelessly corrupt and inefficient and the new Government is refusing to cooperate or play by the rules of the European club. Implicitly and sometimes explicitly Ireland is mentioned as an example of how to do things – take ‘courageous’ decisions to cut public spending upfront, comply with the international creditors and ‘reform’ labour markets, pensions, banks and other institutions. All of this, it is claimed, will bring fast relief by way of market confidence, restoration of market lending, a recovery in business confidence and a growth in exports through competitiveness (although in the case of Greece the economy is more reliant on domestic markets and shipping and tourism are the only major export outlets). The new Syriza Government is styled in commentary, here, as ‘hard left’ for wanting to resist some fresh demands for austerity including continuation of a dismantling of collective bargaining rights, continuing privitisation of valuable public assets in Greece and further cuts to social spending including pensions. International commentators, politicians and economists from a safe distance and comfort look upon at Greece and pronounce on what Greeks should do next by way of further austerity. (They would be appalled if they had to live out the human consequences of the policies they advocate or implicitly endorse for others).

Greece needs breathing space.

That Greece needs political, administrative and institutional reform is beyond question but ‘reforms’ that further undermine workers’ rights and dismantle the social safety nets and protections for European citizens provide no basis for lifting Greek economic performance. Such ‘reforms’ stem more from ideology than any evidence. The Troika overseen adjustment in Ireland was, in reality, reform light because many existing monopolies (e.g. legal services) emerged unscathed and other reforms to labour law were well in train for some time anyway.

So, what reforms are urgently needed in Greece now? Its Minister for Finance gives some important clues in an opinion piece in the Irish Times recently (A pressing question for Ireland before Monday’s meeting on Greece):

….what Greece now needs desperately is serious, proper reforms. We need a new tax system that helps defeat evasion and curtail political or corporate interference, a corruption-free procurement system, business-friendly licensing procedures, judicial reforms, elimination of scandalous early retirement practices, proper regulation of the media and of political party finances, etc.

What Greece needs is time and space to recover economically, humanly and socially. The trauma through which the Greek people have passed and which has been needlessly prolonged by inept European politics and an ideologically driven agenda in some European member states has dealt a blow to solidarity, compassion and a sense of justice. When Europe was destroyed by World War II compassion, common sense and shrewd political strategy allowed the Allies to write off 50% of German public debt (as well as grant an interest holiday to the UK). The vision, urgency and wisdom of the post-war years seems to be lacking among today’s European elites. And closer to home we have too many over-simplistic and one-sided analysis of what is wrong in terms of the Greek situation.

The stakes are high this week for Greece and for the rest of Europe.

If Greece defaults then a chain of events is likely involving capital controls, a shut-down in liquidity in the Greek banks and a real possibility of a depositor ‘bail in’ (which means depositors over a certain limit lose some or all of their savings). An exit from the Euro would not necessarily ensue but that could happen if the crisis were to continue on over the summer months. Default leading in time to exit later on (with issuance of local dual currency notes or promises as a possible staging post) is certainly not beyond the bounds of possibility. At the same time, the stakes are high for the coalition Government elected by a sovereign people. Is national democracy compatible with the new European economic, monetary and political order? This is far from being an academic question.

German political economist, Wolfgang Streeck was prescient in writing the following in his analysis Buying Time: The delayed crisis of democratic capitalism. London: Verso Book (2014:114):

Since in Europe it is not yet possible, in the name of economic rationality, to do away with the remnants of national democracy especially the accountability of Governments to their voters, the method of choice is to integrate national governments into a non-democratic supranational regime – a kind of international superstate without democracy – and have their activities regulated by it.

He suggests that we have two mutually conflicting ‘States’ – Staatsvolk and the Marktvolk. The Staatsvolk describes the citizens’ Tax State which is answerable to voters and taxpayers while the Marktvolk is the public Debt State answerable to market sentiment and cooperation. Loyalty to the Staatsvolk may be at odds with the acceptance of the Marktvolk during periods of prolonged austerity and diminution in the social well-being of citizens. Whereas the Tax State is subject to periodic change or endorsement through elections, the Debt State is subject to periodic evaluation through auctions for government bonds. The Debt State by its nature and constituencies is embedded fully in international capital markets while the Tax State is, still, essentially a national entity.  Loyalty of citizens to governments struggling with debt and problems of growth is matched against confidence of markets in the ability of nation states to pay back debt and to grow in the future (the latter being very much tied to the former).

The marktvolk has the upper hand over the staatsvolk for now

In a nutshell, the problem with Greece is that the Staatsvolk is exhausted with austerity and has no mandate to continue to flog the depressed Greek economy into a further spiral of rising debt, collapsing growth and rising material poverty. It simply has not worked and it is very hard to see how it will work.  A further round of fiscal austerity, as demanded by the European elites is likely to depress growth and not stop a further increase in public debt relative to GDP (chart 2). It is true that the deficit has been dramatically reduced since 2010. However, the stock of debt remains high and Greece remains locked out of capital markets for the foreseeable future. 

Chart 2: Gross public debt in Greece as a % of GDP, 2000 - 2014

Gross Public Debt in Greece

At the same time the Marktvolk demands compliance with fiscal rules and further confiscations of Greek assets. The private banking lenders in Germany, France and other countries lent to Greece in the years prior to the financial crisis. As in Ireland, borrowers and lenders were both at fault. However, private lenders have taken very limited write-down in their bad loans as when in 2012 a partial private sector write-down was undertaken (the value of private lending to the Greek government was reduced). However, by that stage private lenders to Greece including some German and French banks had pulled out a lot of their assets in Greece. From then on official EU funding propped up the Greek banks.  So, the remaining Greek public debt is held by large EU states who are determined not to allow Greece away with any concessions. After all any concessions to Greece would (a) embolden other anti-austerity political movements in other EU States and (b) prove that the Staatsvolk has, after all, a power to moderate the rule of the Marktvolk.

This is more a European problem than a narrow Greek one

The Greek debt problem is a symptom of a wider European problem characterised by:

  • Transfers of private debts to European citizens (including German, French, Finnish, Dutch and Irish …) but especially in the periphery countries.
  • Stagnation and depressed conditions caused by long-term structural problems in the European economies as well as the short-term impacts of austerity policy.
  • Lack of democratic engagement, information and accountability of the main fiscal and monetary policy setting powers in Europe.

The last point is particularly relevant in that last Thursday (18th June) an international Debt Truth Commission established by the Greek parliament presented its report in which it said:

  • there had been a breach of human rights obligations on the part of Greece itself and the lenders, that is the Euro Area (Lender) Member States, the European Commission, the ECB and IMF.
  • The debts are illegal, odious and unsustainable.

But, if Greece has been the victim of a vicious and ultimately self-destructive European political and economic policy, what can be done now? This question needs to be approached on two levels:

  • Medium-term plan to restore Greece
  • an immediate strategy to save, if possible, Greece's position within the Eurozone.

A coherent and politically realistic plan needs to be put in place to restore the Greek economy.

So, what can be done?

In a recent presentation, Giorgos Argitis of the Greek Institute of Labour (a body similar to NERI in Ireland) makes the case for:

  1. A re-structuring of debt (either through a ‘haircut’ or an extension in the period of repayment or in changes to the interest rate charged)
  2. An investment plan mobilising European funds for strategic productive investment in Greece and other member states.
  3. A restoration of collective bargaining and other rights (this is a sticking point between Syriza and the European Commission/Member States as Greece was forced to dismantle collective bargaining rights in recent years).
  4. Direct public intervention by way of a job guarantee programme

Yanis Varoufakis has proposed something broadly similar here in a recent speech he gave to the German Trade Union thinktank, Hans-Böckler-Stiftung when he proposed:

  • Debt restructuring through an agreed swap of government bonds which parks part of Greek sovereign debt with the European Stability Mechanism fund and, in the meantime, pays off the ECB and IMF in full.
  • An investment programme with European Investment Bank partnership to crowd in private investment among other outcomes.

However, while the above proposals seems imminently sensible and feasible were there political will in both Athens and Berlin we live more under a Marktvolk Europe than a Staatsvolk one. What is the Greek Government to do this week and this Monday? This is not an easy decision. The new Greek government does not have a democratic mandate to leave the Eurozone (or the EU). Neither does it have a mandate to continue the destructive policy of austerity (which risks pushing Greece towards an extreme right-wing regime in Athens if Europe is not careful). What if democracy and membership of the Eurozone are not compatible? The only remaining option would be divorce with all the trauma, financial costs and remaining lack of trust that would ensue. Perhaps, some short-term solution is possible to postpone – yet again – the ultimate choice.  A fundamental shift in European politics is years away. Greece is, relatively speaking, on its own within the EU (but possibly not within the European continent – time will tell). The arrival of new governments in one or two other European member states might change matters but that may not be time enough to save Greece. Greece has been victim to Europe failed policies and faulty monetary design as well as its own internal failed political culture as acknowledged by Varoufakis.

Philippe Legrain offers a blunt and concise analysis of where matters are at currently here:

Merkel ought to be as magnanimous with Greece as the United States was with post-Nazi Germany, when Washington forgave half of the West German government’s debts in 1953. But if eurozone authorities won’t be reasonable, unilateral default — and even euro exit — is preferable to debt bondage.

In conclusion

It may be that the Greek Government will have no option but to call a general election and/or conduct a referendum in the coming months. If so, so be it. 

Ireland and its people needs to consider its moral role in this crisis. Will we stand with Europe and all of its people and not just those who profited from the crisis and are wedded to a polity that does not respect the fundamental values of equality, respect and freedom?

(It would still not be too late for Ireland to offer to host a European Debt Conference in Dublin Castle later this year. it would be good for business and since we have been so well 'behaved' someone might listen? An avuncular Irish Finance Minister together with a charismatic game theorist in St Patrick's great hall in the Castle - just imagine!)

We are, all, living in challenging times.

 

Posted in: Macroeconomics

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