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March 6, 2012

Is there any way out of the Greek crisis?

by Ben Hillier

Greek Crisis

Despite two years of "therapy" Greece is still mired in economic crisis and on the brink of a serious default. How did the country get to this position and why isn’t the austerity-driven restructuring of the economy pulling the country out of the mess? What other alternatives are available to it?

The decline of the Greek economy

In 2008 Greece entered a GFC-induced economic recession. Among other things the contraction resulted in Greek Government revenues dropping 15 percent through 2009. The decline, along with bailouts for financial institutions, increased the budget deficit (the difference between revenues and expenditure), but not dramatically.

It proved to be the beginning of the end. A series of financial shocks resulted when, in early 2010, it was discovered that successive governments, in collaboration with the investment bank Goldman Sachs, had systematically hidden the full extent of government borrowing. The newly-elected PASOK Government revised the deficit figure from 5 percent of GDP to nearly 13 percent (it was later revised upwards again to nearly 16 percent, with a total debt of 129 percent of GDP).

This created immediate problems. International speculators – their wallets fat from the huge injection of cheap funds into the system in the wake of the collapse of the North Atlantic financial sector – gambled on the government defaulting. Foreign banks began to demand higher returns on money loaned to the Greek Government, while ratings agencies began to mark down Greek bonds to junk status. By April 2010 the private market had essentially frozen. Loans now had to come via international bailouts from capitalist institutions and governments intent on squeezing the country for all it was worth.

PASOK, in consultation with the European ruling classes, implemented an austerity budget in February 2010. Included were measures to freeze the salaries of government employees and cut their bonuses by 10 percent. The message was clear – workers were going to pay for the capitalists’ crisis. A second budget was announced in March, which contained provisions for a further 12 percent cut in public bonuses and a rise in the rate of the Value Added Tax (equivalent to a GST). But it went further – a 7 percent cut in the salaries of all employees. The European Central Bank (ECB) released a statement encouraging the cuts:

This determined fiscal and structural reform programme will benefit Greek citizens by allowing the Greek economy to overcome the present difficulties and bringing the economy back on a sustainable medium-term growth path with increasing employment.
The deficit was down 40 percent from the previous year, but the debt to GDP ratio climbed to 145 percent: total debt was rising as revenues continued to be squeezed by the contracting economy. Not two months later the Greek Government was crying out for financial support. It had no money to pay the debt and no one was loaning out.

On 3 May PASOK signed a “Memorandum of Economic and Financial Policies”, which was the basis for European Commission, ECB and International Monetary Fund (the so-called “troika”) oversight of what was now clearly an austerity-driven structural adjustment of the Greek economy. In return the euro area countries and the IMF stumped up €110 billion for a 3-year bailout package.

This “help” was delivered on the proviso that a third austerity program be implemented. Passed by the parliament at the end of June, the measures were unprecedented in scale. They included raising by four years the retirement age for public servants; a further 8 percent cut in allowances; another rise in the VAT; and a proposed sell-off of two-thirds of public-owned companies. Again the ECB, which had effectively dictated the policy, showered praise on its adoption:

The European Central Bank (ECB) welcomes the economic and financial adjustment programme which was approved today by the Greek Government… The ambitious fiscal adjustment and comprehensive structural reforms under the programme are appropriate to… [stabilise] the fiscal and economic situation over time.
Over the course of the year Greece sank deeper into recession. The “sustainable medium-term growth path with increasing employment” was wishful thinking. Entering the eurozone had been a bridge to cheap credit, but the euro currency now choked the economy: there was no way to devalue money to reduce the value of the debt and increase export competitiveness. Instead mainstream economic theorists talked about “internal devaluation”: smashing wages to increase company profitability. The result was not just cheap labour. It meant lower consumption, lower economic growth and a further lowering of government revenues.

The unemployment rate continued to rise sharply. Undeterred, the troika kept up the pressure. In November they wrote: “Our overall assessment is that the programme remains broadly on track… Regarding the outlook, the economy is expected to begin turning around in 2011.”

They were wrong again. A further austerity package in June 2011 outlined a wholesale sell-off of government assets, increases in taxes on working class incomes, more VAT increases, taxes on housing and more. By July 2011 a second bailout package was required. This time it foreshadowed private investors taking some losses on their loans. Industrial production dropped more than 11 percent over the year and government revenues decreased by almost €2 million. The economy contracted at a faster pace through 2011 than had been the case in 2010, which itself saw a larger decline than 2009. As a result, debt increased to around 160 percent of GDP.

It was becoming clear to those who had earlier refused to see that, if the economy kept shrinking, the money could not be repaid. “Kicking the can down the road”, was how one economist had described the entire process. Every bailout was, absent a turnaround in the economy’s growth fortunes, just buying time before an inevitable default.

By October the ECB had revised their outlook, acknowledging that a recovery was not on the cards until at least 2013. The troika didn’t take responsibility for the catastrophe that was unfolding. Seeing Greece in an advanced state of starvation they instead demanded it eat less food:

There is no evidence yet of improvement in investor sentiment and the related increase in investments, in part because the reform momentum has not gained the critical mass necessary to begin transforming the investment climate… [I]t is essential that [new] measures focus on the expenditure side [i.e. more cuts in spending].

To ensure a further reduction in the deficit in a socially acceptable manner [!] and to set the stage for a recovery to take hold, it is essential that the authorities put more emphasis on structural reforms in the public sector and the economy more broadly.
As the ECB revised their outlook Prime Minister Papandreou received parliamentary backing for even more austerity measures – again required for another €100bn bailout loan. This time, however, private creditors were asked to accept write-downs of 50 percent – which represented a default of some €100bn, bringing the debt down from €340 billion to €240 billion.

In November a political crisis erupted. Ongoing working class revolt through repeated general strikes and mass mobilisations pushed the prime minister to call a national referendum on the question of austerity and debt repayment. It was an attempt to blackmail the population into accepting the program, but the thought of workers having a democratic say over the key question in Greek politics was too much for the establishment. Within two weeks of announcing, then withdrawing, the referendum proposal Papandreou had been forced out. Lucas Papademos, former Governor of the Bank of Greece and former Vice President of the European Central Bank, was installed at the head of government. This was the most decisive indication yet that the ruling class would stop at nothing to honour the Memorandum with the troika.

Now there is even more pain on the way. The second bailout package (now worth €130 billion) was renegotiated in February. Accompanying it were demands further austerity, plus a commitment from the political parties that the squeeze will be maintained regardless of who wins the next round of national elections (due at the end of April). This fifth round of austerity includes a 22 percent cut in the minimum wage (32 percent for those under 25), the cancellation of holiday bonuses, and a further 150,000 public sector cuts by 2015.

Can austerity “work”?

The approach of the establishment was never meant to “work” for the bulk of the Greek population. For the ruling classes of Europe, however, there is a certain logic to it. First, the government bailouts go straight into the pockets of the creditors, so kicking the can down the road at least means a continuation of revenue flows to the big international banks. Second, even if that means partial defaults along the way, the Greek economy has to bottom out at some point. When it does, the bosses calculate that it will be able to become profitable more quickly (therefore more capable of repaying debt) if working class living standards have been pushed into a ditch in the meantime.

Third, with large sections of the North Atlantic financial system still reeling from the GFC, postponing another shock to the system might at least provide time for bank recapitalisation and to construct mechanisms (like the European Financial Stability Fund) to help transfer yet more wealth from workers to the financial sector in the event of more contagion. Fourth, if nothing else Greece serves as a message from Germany and France to other EU member states: impose fiscal discipline or this may be your future.

Regardless of the logic, Neoliberal prescriptions continue to fail dismally. Creditors want the money they loaned paid back, but they demand measures that push down growth, consumption and revenues, and therefore inhibit the payments. And by kicking the can down the road, a greater crisis is not merely postponed, but potentially exacerbated as Greece is pushed further into the abyss of insolvency. The second bailout deal has still not been implemented and last week Greek banks were shut out of the credit markets.

A leaked confidential report prepared for eurozone finance ministers in mid-February has outlined how the country’s debt will, all things remaining equal, be about the same proportion of GDP in 2020 as it was in 2008. If recession is worsened by the austerity, or other “shocks” to the system, debt could remain at 160 percent of GDP eight years from now. Actually, the report predicts that, under pretty much every scenario, more than a decade of austerity will leave Greece’s finances in a worse state than when austerity was first prescribed!

But the country is already devastated. According to the government statistical agency (pdf) the total real contraction of the economy over the four years to the end of 2011 was almost 18 percent. Industrial production is almost one-third lower than in 2005 and manufacturing is contracting at an increasing pace. Over twenty percent of shops in central Athens are closed. More than one-third of the country is living in poverty. The official unemployment rate is above 20 percent; youth unemployment is around 50 percent. As Prokopis Hatzinikolaou observed last month in the Greek daily Ekathimerini, the situation continues to deteriorate:
Revenues posted a 7 percent decline [in January 2012] compared with January 2011, while the target that had been set in the budget provided for an 8.9 percent annual increase. Worse still, value-added tax receipts posted an 18.7 percent decrease last month from January 2011 as the economy continues to tread the path of recession… The VAT revenue data represent a particular worrying sign regarding the depth of recession for 2012, while even more painful measures are expected to lead to a reduction in salaries and therefore a further drop in consumption…
That raises the question: what does the Greek ruling class get out of this? Despite populist imagery in Greece depicting German Chancellor Merkel as a modern day Hitler intent on a second occupation, it is not simply the case that the European establishment is forcing the hand of the Greek Government. Panos Petrou of the Internationalist Workers Left recently pointed out that despite the hand-wringing of the Greek politicians,

many of the measures that the Greek Government is supposedly being forced by its creditors to implement are longstanding demands of the Greek industrialists and bankers, dating back from the 1990s. You don’t have to be an economist to understand that the reduction of private sector wages and attacks on the right to collective bargaining have nothing to do with the state’s finances…
Sections of Greek capital are surely hurting, but they see this as a once in a lifetime opportunity to create a truly low wage economy. When they say that austerity is working, this is what they mean. Moreover, the Greek elite want to be part of the imperialist Union. Being demoted within the economic bloc or being seen to retreat from it at this stage would be a political blow for the Greek establishment, and would leave them less able to assert themselves in the region. Their international standing is considered more important than the lives of Greek workers, and worth some medium term pain to themselves.

The alternative

Austerity is based on the prognosis that Greece’s crisis is the result of too much government spending. It sounds plausible when the entire story seems to centre on debt. After all, surely everyone knows that debt is a result of spending more than you’re earning? The real world isn’t so straightforward.

Greek Government expenditure, as a proportion of GDP, is less than the European Union average – and, individually, less than Germany, Sweden, Belgium, Denmark, France, Finland, the Netherlands and others. Public social expenditure as a percentage of GDP is significantly less than in Germany and France. Further to this, as the OECD noted last year (pdf),
Greece has one of the lowest rates of public employment among OECD countries, with general government employing just 7.9 percent of the total labour force in 2008… Across the OECD area, the share of government employment [averages] 15 percent.
Nor is it for lack of work that the country is in crisis – Greek workers work longer hours than anyone else in Europe, and rank second in the OECD for hours worked per year. The real problem is a contracting economy in which revenues are already far below the European average. So the problems are not fundamentally about the debt at all.

Yet the myth of a bloated public sector and profligate government spending persists. Why? Because with it, the prescriptions of the ruling class can be given some sort of logic. It is a means for the neoliberal narrative – sidelined by the collapse of the North Atlantic financial sector in 2008 – to again gain traction. “The recipe … isn’t right or wrong; it’s the only one available,” said Papandreou last month. This is just the latest incarnation of Margaret Thatcher’s famous saying “There Is No Alternative” (to free market economics).

But there is an alternative: quite simply, do the opposite of what the Greek Government and the European ruling classes are doing.

They are implementing mass privatisations and sacking hundreds of thousands of workers; instead, key sections of industry and finance should be nationalised and people guaranteed jobs in socially useful employment. They are slashing pensions and welfare payments; instead the assets of the ultra-rich should be seized. They demand the debt be repaid through the sacrifices of the working class; instead the banks should be told they will get not one red cent. The rich say “The market must rule”; instead working people should rule – there needs to be genuine democracy.

The establishment say any of the above things would lead to catastrophe – as though the situation for workers is not already catastrophic. But if the workers’ movement in Greece is able to assert itself in such a way as to make reality some of their demands (not paying the debt is one of those), they will potentially find support from millions of workers around Europe.

In a series of countries, workers are fighting the same austerity agenda. A breakthrough in one country could quickly result in a breakthrough elsewhere. Far from being isolated pariahs, Greek workers would prove an inspiration through Europe in the same way the masses of Tunisia proved an inspiration to their brothers and sisters throughout the Arab world.

Reprinted with permission from Socialist Alternative.