The Greek elite prefers to eat its children

Bill Mitchell

The press has been increasingly highlighting the on-going Greece situation. What is important to note is that the neo-liberals are no longer honey-coating the fiscal austerity in terms of “fiscal contraction expansion”. The Greek finance minister is now saying that the Greeks have a choice between disaster and total disaster. Others are juxtaposing sacrifice with chaos. I have noted that in recent months that a lot of commentators have been asserting that an exit would be a disaster – far worse than the current “disaster” of 4 years recession and more to come. But rarely do you read any coherent analysis of what might happen should Greece exit the Eurozone. My view is that while the dislocation would be intense and costly it would, in the longer-term, be less costly than the current alternative – which is persistent recession for the foreseeable future and a savage erosion of living standards, especially for the next generation. As one commentator put it recently – the current austerity approach with “deep structural inequalities and its rigid adherence to a failed economic ideology, protects neither democracy nor human rights. Stiff-necked and punitive, it prefers to eat its children”.

It is ironic that the fiscal austerity argument is often phrased in terms of needing to take the “crippling” debt burden off future generations. However, the damage that the bailout packages are doing to those generations is highly significant yet that irony is never noted.

The UK Guardian article (Feb 12, 2012) ‘As Greece stares into the abyss, Europe must choose’ made this point emphatically:

 

Six inches from the riot policeman’s shield outside the Greek parliament last Friday, a tall, pale boy was shouting at a man who could have been his uncle: “It’s your generation that brought us to this point, but it’s mine that has to pay for it. You have to take responsibility for what’s happening here”.

 

It should be noted that bankruptcy only applies to the nation’s status as a user of a foreign currency (Euro) and becomes irrelevant once the nation restores its own currency. As I discuss below, under those terms, it can duly re-denominate all foreign-currency obligations in terms of its new currency and solvency then becomes guaranteed.

It is interesting that there is horror expressed by commentators about the possibility that the Greek government could enforce creditors to accept Drachma instead of Euros, the same horror is not expressed when the Troika propose a PSI arrangement that could carve up to 75 per cent off the value of current Greek bond investments (in Euros).

I will come back to the political assessments later but you note that they are no longer making the mainstream macroeconomic argument that has been justifying the imposition of austerity – that growth is just around the corner once the private sector realises that the deficit cutting will reduce future tax burdens and as a consequence they stop saving and start to spend again.

That nonsense – was always nonsense – and its bald-facedness is now being exposed. The future for Greece under current policy is bleak and the private sector know it.

The Troika (EC/IMF/ECB) operating through the agency of the Finance Ministers Summit initially wanted Greece to impose further – huge – cuts in net public spending in return for the next bailout installment that would see that nation pay up on its impending debt commitments.

The ridiculousness of the whole deal was that the Greeks were expected to achieve certain fiscal targets by this time. The progress of the Greek cutbacks is reviewed every three months by the baleful bureaucrats within the EC and the IMF. What they expected to happen each three months is of some confusion. The indications are that they actually expected the fiscal situation to improve.

But it was always obvious that under current conditions – fiscal austerity would lead to an increasing budget deficit and rising public debt ratio – as aggregate demand continued to contract.

All the real GDP estimates of the Troika have been shown by unfolding events to be over-optimistic. The Greek economy is in a severe downward spiral and has been getting worse for the last 4 years.

The deep recession is now entirely self-imposed by the Troika and its henchmen/women in the Greek polity.

But it is now well-known that the Finance Ministers acting turned nasty on Greece last week and demanded even harsher cuts including a 22 per cent cut in the nominal money wage (a much larger cut in real terms), drastic cuts in pensions and public sector employment cuts of up to 15,000 workers by 2015.

These additional cutbacks are the equivalent of about 7 per cent of GDP over the next three years and under those circumstances the Greek economy will remain in recession at least over that period.

It seems inconceivable that a nation would tolerate seven or eight years of enforced recession when it is largely unnecessary.

The Germans have been claiming that even with these latest proposed cuts the public debt ratio will remain above 120 per cent of GDP.

The media are also perpetuating the claim that chaos would follow a Greek- exit from the Eurozone.

The UK Guardian article (February 12, 2012) –There’s talk of an exit – but default would have catastrophic consequences — claimed that the “break-up would bring banking chaos”.

The article said that a “Grexit … would send shockwaves throughout the world economy”. Apparently:

 

… default and “re-drachmatisation” would be a costly and chaotic process … in the short term banks across the eurozone might have to be closed to prevent a run on the single currency as investors speculated about which country might be next. A new wave of bank nationalisations would be likely to follow as lenders counted their losses on now worthless Greek debt.

Capital controls would have to be imposed and borders shut to stop money flooding out of Greece. Portugal, Italy and Spain would come under intense pressure from investors wary about the risk of another victim. Banks everywhere, already reluctant to lend, would cut back hard, nervous about their exposure to the bonds of all Europe’s crisis-hit states.

For Greece, a drastic devaluation … could at least provide the hope of an export-led recovery. But unlike Argentina, which defaulted on its debts in 2001 after a wrenching political and economic crisis, Greece has neither the advantage of plentiful natural resources nor a boom in the world economy to ride.

 

So you get the message – chaos – drastic devaluations etc. No mention of the recent ECB initiatives to provide at virtually zero cost massive long-term funding to European banks.

No mention of the growth that the Greek government could engender immediately if it regained currency-sovereignty.

Further, the implication that capital controls are chaotic would not sit with Malaysia during the Asian crisis. The IMF has also released research showing that capital controls are effective and beneficial.

One hypothesis about the behaviour of the Germans and French (and other northern European leaders) over the last few years in relation to Greece it that they have been buying time. The process of grinding Greece into the ground has allowed the rest of the Eurozone to shore up the dykes!

This point is made by the UK Guardian’s economics editor Larry Elliot in his article (February 10, 2012) – European debt crisis pitches Germany against Greece. He says that “(t)he Germans want the Greeks out. That is the clear message from the decision by Europe’s finance ministers to reject the offer of a fresh package of austerity measures”.

He considers that the time is now ripe to get rid of the Greeks because the Germans now have the view that “the actions taken by the European Central Bank over the past couple of months have been sufficient to ensure no contagion effects from Greece to the other debt-stricken eurozone members and, just as importantly, to the fragile European banking system”. I tend to agree with that assessment.

It is probable that what has been taken to be bumbling by the political leadership in the Eurozone has also been a process of buying time while the European banks – assisted by the ECB – have been reducing their exposure to the Greek economy.

In that context, are these claims of chaos justified? I think not unless Greek society is so unstable that it is likely to disintegrate anyway.

The Citibank recently released a Report (I cannot link to it because it is subscription only) which introduced the term Grexit into the lexicon. More importantly, the discussion acknowledges that the financial markets are now openly considering the exit of Greece from the Eurozone.

Conclusion

No-one is denying that the Greek economy has structural issues which predicate it to imported inflation. Even with the harsh fiscal austerity which has seen its unemployment rate rise to above 18 per cent with no ceiling in sight, the current account deficit has risen.

Its export base is narrow and it imports a wide variety of consumer goods including food.

But those problems are not going to be solved more quickly by impoverishing the nation. A freely floating exchange rate will be a more effective way of attenuating the imbalances that have emerged between northern and southern Europe with respect to trade.

However, the real bonus that an exit would bring is that the Greek government could unambiguously concentrate on a domestic growth strategy and put an end to its recession.

The last four years have brought the need for some reforms – to the taxation and pension system – into relief. Within a growth context, the Greek government would probably have a better change of brokering these changes with its population than under the current conditions which are fermenting total social breakdown and open rebellion.

The UK Guardian article (February 12, 2012) – As Greece stares into the abyss, Europe must choose – brings home the reality of the fiscal austerity:

When you ask people on the street if they would rather Greece went bankrupt than submit to further measures, many now point out that it is already bankrupt, that public sector workers have gone unpaid for months, that hospitals have no supplies, that the poor are being wrung dry in order to pay the banks. “Let’s get it over with,” a woman who works for the education ministry said to me. “Then we’d know we only had €250 a month and we could start again. This is not the people’s Europe we dreamed of.” The fact that Poul Thomsen of the IMF, the eurozone’s poster boy Mario Monti, the markets and countless economists agree that more austerity will deepen Greece’s depression without making the debt sustainable adds weight to her argument … [and the current fiscal austerity] … with its deep structural inequalities and its rigid adherence to a failed economic ideology, protects neither democracy nor human rights. Stiff-necked and punitive, it prefers to eat its children.

Extracted from a blog by Prof Bill Mitchell, University of Newcastle, NSW The reference for the full blog is: http://bilbo.economicoutlook.net/blog/?p=18172