Greece is being blown away by the Brussels and Berlin blunderbuss
The strain on a country whose rulers are desperate to avoid a euro exit will lead it to poverty and dysfunctionality
by Costas Lapavitsas/ Guardian
Last week I was in Athens and took the metro to Syntagma Square. Like many northern Greeks, I have mixed feelings towards the capital. Northerners do not like to admit it, but we secretly enjoy the smell of jasmine – the true scent of Athens. But this time the air smelt of cordite.
Syntagma was abnormally quiet: shops shut, people halfheartedly shopping, riot police everywhere. The atmosphere crackled with the expectation of something sinister about to happen. And lo, in Monastiraki Square, afew hundred yards away, agroup of young men attacked a shop owner; just another violent episode in a city resembling a tinderbox.
The prime culprit for the disintegrating social order is the economic policy emanating from Brussels and Berlin. In 2009-10 the troika – the European Union, International Monetary Fund and European Central Bank – judged that Greece had a problem of public deficits and debts due to profligacy, corruption and tax avoidance. They offered bailout loans in exchange for cuts to public spending, higher taxes, and reduced wages. Successive Greek governments have imposed austerity with alacrity, delivering a vast contraction of the deficit – perhaps even 8% of GDP by the end of 2012.
The trouble was that austerity could not have its usual accompaniment of currency devaluation, since the country remained a member of the European monetary union. The pressure of adjustment thus turned inward, causing an unprecedented depression – GDP has contracted by 4.5% in 2010, 7% in 2011 and probably 7% in 2012. Unemployment has rocketed, and a humanitarian crisis has emerged in urban centres. The NGO Médecins du Monde estimates that for the past several months the majority of its clients have been destitute Greeks rather than immigrants. Its medicine stockpile is currently running very low, and its managers have no idea how they will cope this winter.
But cope they must, because the troika is now demanding a further bout of austerity – cuts of nearly €12bn to create a large primary budget surplus and to start reducing Greek public debt by 2014. Desperate to remain in the EMU, the Greek government has agreed to slash pensions, retirement lump sums, public sector wages, social expenditure and military spending. The ensuing reduction in aggregate demand means recession will continue next year, with official unemployment perhaps even reaching 30%. In 2013 there will be people in Athens who will not have enough to eat. The tragedy is that the pain will be for nothing as the fresh austerity will probably fail. The troika is yet again underestimating the depth of the oncoming recession, and thus the loss of revenue and the higher unemployment expenditure. Greek public debt, meanwhile, remains completely unsustainable. It is very likely that further austerity measures will be demanded in 2013 and beyond.
At the root of this bad economics is a misreading of the causes of the crisis. Greece’s problem is the same as Portugal’s and Spain’s: a flawed monetary union that has split Europe into core and periphery. Peripheral competitiveness has been destroyed, and the periphery has accumulated vast private and public debts – owed to eurozone banks – which will probably never be repaid.
Banks are at the epicentre of the eurozone crisis, not states. The solution would have been to shut down bad banks and create healthy ones across Europe. But this would have meant German and French taxpayers bearing the costs of restructuring Italian and Spanish banks: an impossibility. Thus, national banking systems have been allowed to drift closer to their own nation states during the past three years: banks have relied on their own states to be rescued, and states have relied on their own banks to borrow. The result has been the fragmentation of eurozone banking, producing enormous divergences in interest rates among member countries. The monetary union is collapsing from within.
Today, ECB president Mario Draghi tried to stop the rot by promising to buy unlimited amounts of short-term public debt from states that accepted austerity programmes. His aim was to compress interest rates and reverse the fragmentation of banking, but it will be a short-term palliative at most. Banks need restructuring, and peripheral competitiveness needs to be restored through an investment programme to raise the productivity of labour. Instead, the EU has opted for the blunderbuss of cuts to labour costs. For the periphery this means high unemployment and low growth; for the eurozone it means a break-up is more likely.
For Greece, where EU policies are most sharply felt, the implications are dreadful. The country will become a poor, aging, dysfunctional and irrelevant corner of Europe.The purchasing power of wage earners fell by 23% in 2010-11, and yet the country continues to slide down the competitiveness tables. Nothing daunted, the troika is now going as far as proposing the return of the six-day week and the actual lengthening of the working day. Labour unrest and anti-social behaviour seem inevitable.
Greece’s ruling elite fear a euro exit and so will acquiesce to the troika’s demands, hoping to buy time until an overall eurozone settlement is reached. But the balmy days of credit-driven eurozone growth are gone for good. Even if a eurozone collapse is avoided, it will be too late for Greece. To put its economy and society together again, the country must default and exit the monetary union. Profound political change will follow. Some semblance of normality might then return to Syntagma Square.