In January the Greek electorate voted anti-austerity party Syriza into power. Since then they haven’t deviated from their pledge to resist austerity but their commitment has been met with extreme hostility from the EU and Troika which of course many foresaw. On Monday the Greek government were forced to impose capital controls to prevent a collapse of their financial system after the ECB limited financial assistance to the Greek banks and then on Tuesday Greece went into arrears after failing to pay a 1.6 billion payment to the IMF.
Like all crises, understanding what precipitated them is essential to ensuring they don’t happen again, some of course will try to obfuscate the real reasons behind the crisis to prevent any meaningful change occurring. Prior to the global financial crisis in 2007 Greece had one of the fastest growing economies in the Eurozone with 14 years of consecutive growth. In 2004 they joined the Eurozone and by virtue of that their currency changed to the Euro, by transferring their currency to the Euro, Greece ceded their monetary sovereignty and went from being a currency issuer to a currency user. The Euro was created for ideological and political reasons, not because it was economically viable, a fact recognised by the former president of the European commission.
Following the great recession of 2007 & 2008 the Greek economy faced its largest crisis in decades. A variety of factors contributed to this including their entry into the Eurozone and the corruption of their neoliberal government who engaged in high risk borrowing which was enabled by high risk lending. Because of their inclusion into the Eurozone they lost their sovereignty over key fiscal matters, and lost the ability to employ such measures like devaluation in a time of calamity. In 2010 Troika responded by launching a 110 Billion bailout program on the condition that Greece impose austerity, make structural reforms and privatise state assets. Needless to say, these policies pursued by Troika have been an unmitigated disaster; since their implementation Greece’s GDP has declined 25% and overall unemployment rose to a whopping 28%. One of the accusations levelled at Greece is it has done nothing to mitigate its suffering, this argument has no resemblance to reality however. Spending has been reduced considerably, approximately 20% lower than it was in 2010, social benefits have received a dramatic cut, taxes have been raised and pensions which were higher than average have also been decreased. Another malicious claim is that the Greeks are lazy. The OECD data actually testifies to the opposite. On average they work longer hours than other European countries and considerably longer than German workers. So why are this misconceptions so prevalent? Because they’re designed to disguise the disastrous effect of the inhumane impositions from Troika.
Inevitably these policies sowed resentment in Greece, with many people taking to the streets to protest, and others participating in worker strikes.
Syriza’s moment had arrived. Elected on their promise to confront the failed policies of the EU, Syriza haven’t relented yet but they are facing a hostile response from the EU who are unwilling to make any significant concessions or provide any reasonable proposals. Whether Syriza will be victorious in their pursuit of liberating their country from draconian impositions is yet to be determined but what is abundantly clear is that they are the first government to really mount a significant challenge to the Neoliberal order and that is why their approval rating has risen since election and why they’re receiving significant support across Europe.
Paul Krugman, a Nobel prize winning economist on the harmfulness of Troika’s polices:
What went wrong? I fairly often encounter assertions to the effect that Greece didn’t carry through on its promises, that it failed to deliver the promised spending cuts. Nothing could be further from the truth. In reality, Greece imposed savage cuts in public services, wages of government workers and social benefits. Thanks to repeated further waves of austerity, public spending was cut much more than the original program envisaged, and it’s currently about 20 percent lower than it was in 2010.
Yet Greek debt troubles are if anything worse than before the program started. One reason is that the economic plunge has reduced revenues: The Greek government is collecting a substantially higher share of G.D.P. in taxes than it used to, but G.D.P. has fallen so quickly that the overall tax take is down. Furthermore, the plunge in G.D.P. has caused a key fiscal indicator, the ratio of debt to G.D.P., to keep rising even though debt growth has slowed and Greece received some modest debt relief in 2012.
Why were the original projections so wildly overoptimistic? As I said, because supposedly hardheaded officials were in reality engaged in fantasy economics. Both the European Commission and the European Central Bank decided to believe in the confidence fairy — that is, to claim that the direct job-destroying effects of spending cuts would be more than made up for by a surge in private-sector optimism. The I.M.F. was more cautious, but it nonetheless grossly underestimated the damage austerity would do.
Regardless of what caused this crisis, the policies implemented by Troika are exacerbating the immiseration endured by the Greek people. The bailout money provided to Greece predominately goes back to the banks, with less then 10 percent used to reform the economy and reduce the suffering of the Greek people. In terms of economic growth austerity measures, which cut public expenditure are counterproductive and likely to compound insolvency. Cutting public spending and imposing high taxes on the average citizen reduces their disposable income and leads to low consumer spending.
Austerity which has been implemented in various countries throughout Europe at the behest of the EU has not yielded any positive economic result whatsoever and has actually undermined economies yet it continues to be perpetuated. Empirical research testifies to this fact as does the demands from world renowned economists that the EU end austerity:
Economist Martin Wolf analyzed the relationship between cumulative GDP growth in 2008–2012 and total reduction in budget deficits due to austerity policies in several European countries during April 2012. He concluded, “In all, there is no evidence here that large fiscal contractions [budget deficit reductions] bring benefits to confidence and growth that offset the direct effects of the contractions. They bring exactly what one would expect: small contractions bring recessions and big contractions bring depressions.”
Economist Paul Krugman analyzed the relationship between GDP and reduction in budget deficits for several European countries in April 2012 and concluded that austerity was slowing growth. He wrote: “this also implies that 1 euro of austerity yields only about 0.4 euros of reduced deficit, even in the short run. No wonder, then, that the whole austerity enterprise is spiraling into disaster.”
On Sunday Greece will have a plebiscite on its bailout conditions, Tsipras who views the bailout terms as unacceptable is imploring the Greek people to vote no, he feels that because Syriza only received 36% of the vote in January that all Greek people, even those who opposed Syriza deserve a vote on a matter of such importance. He believes that if Greece vote no, that it would send an unmistakable message to the EU that Austerity is contrary to the will of the people and that it would provide him with a mandate to reject their conditions. The decision to hold a referendum has been met with fierce anger from the EU. Just prior to the referendum Yanis Varoufakis accused the creditors of committing economic terrorism. Members of both the no and yes side have been out in the streets of Athens rallying for their respective causes.
Joseph Stiglitz, a Nobel prize winning economist on the vote:
It is hard to advise Greeks how to vote on 5 July. Neither alternative – approval or rejection of the troika’s terms – will be easy, and both carry huge risks. A yes vote would mean depression almost without end. Perhaps a depleted country – one that has sold off all of its assets, and whose bright young people have emigrated – might finally get debt forgiveness; perhaps, having shrivelled into a middle-income economy, Greece might finally be able to get assistance from the World Bank. All of this might happen in the next decade, or perhaps in the decade after that.
By contrast, a no vote would at least open the possibility that Greece, with its strong democratic tradition, might grasp its destiny in its own hands. Greeks might gain the opportunity to shape a future that, though perhaps not as prosperous as the past, is far more hopeful than the unconscionable torture of the present.
I know how I would vote.
Paul Krugman on why Greece should vote no:
Greece should vote “no,” and the Greek government should be ready, if necessary, to leave the euro.
To understand why I say this, you need to realize that most — not all, but most — of what you’ve heard about Greek profligacy and irresponsibility is false. Yes, the Greek government was spending beyond its means in the late 2000s. But since then it has repeatedly slashed spending and raised taxes. Government employment has fallen more than 25 percent, and pensions (which were indeed much too generous) have been cut sharply. If you add up all the austerity measures, they have been more than enough to eliminate the original deficit and turn it into a large surplus.
So why didn’t this happen? Because the Greek economy collapsed, largely as a result of those very austerity measures, dragging revenues down with it.
Much as the prospect of euro exit frightens everyone — me included — the troika is now effectively demanding that the policy regime of the past five years be continued indefinitely. Where is the hope in that? Maybe, just maybe, the willingness to leave will inspire a rethink, although probably not. But even so, devaluation couldn’t create that much more chaos than already exists, and would pave the way for eventual recovery, just as it has in many other times and places. Greece is not that different.
Second, the political implications of a yes vote would be deeply troubling. The troika clearly did a reverse Corleone — they made Tsipras an offer he can’t accept, and presumably did this knowingly. So the ultimatum was, in effect, a move to replace the Greek government. And even if you don’t like Syriza, that has to be disturbing for anyone who believes in European ideals.
Most reasonable people will agree that irrespective of what triggered this crisis it is incumbent on those with power to alleviate the suffering of the Greek people and try to facilitate its return to prosperity. First of all we have to recognise that the unfathomable amount of debt Greece has incurred is unsustainable and it’s not feasible for it to be paid back in its entirety, however their creditors have not shown a whiff of leniency. This is not exactly unprecedented, following the end of the 2nd World War, Germany owed a considerable amount of debt to its creditors which included Greece, a country whose economy was destroyed by the Nazis.
The debt relief they were provided with gave impetus to economic prosperity and Germany developed into a major economic power who now have massive leverage over other countries.
Even the IMF acknowledge the unsustainability of the debt and the urgency of considerable debt relief, in a document which was released yesterday which vindicates Syriza’s position that a restructuring of debt is needed and angered the EU: “The IMF has electrified the referendum debate in Greece after it conceded that the crisis-ridden country needs up to €60bn of extra funds over the next three years and large-scale debt relief to create “a breathing space” and stabilise the economy”.
Another policy conducive to growth would be a stimulus package containing enough capital to stimulate the economy, in 2009 America introduced a stimulus bill with the purpose of limiting the damage from the financial crisis, the consensus from economists was that it had a positive effect on employment. So if Troika are genuinely interested in the welfare of the Greek people they will start espousing policies which are actually empirically proven to work. But all evidence suggests they are not. If Troika do not make any concessions, the most advisable course of action for Greece may be to exit the Euro, return to their previous currency, the drachma and devise a new economic system which is predicated on fairness. If Syriza’s strategy yields a successful outcome perhaps it will embolden the other peripheral nations to reconsider their subservience to the EU.
The neoliberal doctrine espoused by the EU is becoming increasingly untenable, and its inherent flaws all the more obvious. But radical change is not going to come from the oligarchs who have every interest in maintaining the system. The Greek debt crisis is no anomaly, but is in fact symptomatic of a fundamentally flawed economic system. Failure to address this will not only inflict more suffering on the Greek people, but anyone beholden to the EU. A no vote on Sunday would be the largest repudiation of the EU’s economic policy to date, it’s imperative that the message is sent.
Essential piece to read with relate to the Greek debt crisis: