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Greece: the crisis deepens « Previous | |Next »
June 15, 2011

The Greek crisis appears to be getting worse. The austerity policy prescribed by the EU, IMF and ECB in exchange for €110bn of emergency loans last May, has resulted in a deeper than expected recession with further cost-cutting measures now seen as crucial if Greece is not only to rein in its debt but make it sustainable. This austerity has ramifications for the eurozone.

Greece1.jpg
Athens has been told that without further austerity there can be no more aid from finance capital. The Greek economy appears to be stuck in a vicious cycle of being unable to decrease deficits while increasing competitiveness. The country may be heading towards a major crisis of ungovernability with unpredictable consequences.

Takis S Pappas at Open Democracy says that:

After over a year of trial and error, Greece’s bailout of 110 billion euros has not worked since the tough austerity measures that were imposed upon Greeks have failed to significantly eliminate deficits; instead, budgets remain out of balance and spreads have continued to blow out causing a surge in borrowing costs .... As with the first bailout package, the new one is given to Greece on condition of yet another round of fiscal austerity measures and tax increases. Further tightening is however certain to deepen the recession and make it even harder for the government to cut deficits.

He adds that Greece’s chance of reviving its economy, and paying off its debts, looks nil. The country has to keep paying full interest and principal on a debt burden that now approaches 148 percent of GDP, and is rising. Debt restructuring, therefore, looks like a very likely outcome. He calls for using the crisis to initiate political reform.

His argument is that:

the crisis has its origins in grave pathologies of the political system over the last three decades, recovery will require much more than wise economic management. It will in fact require the remaking of Greece’s whole political and institutional system.

Pappas traces this in terms of the rise of irresponsible populism, unrestrained patronage politics, and a powerful culture of ethnocentrism that worked against the country’s full europeanization. The signs of law evasion, rioting, extreme social polarization, and generalized anomie indicate a seriously pathogenic political system.

If Greece is to exit the current crisis and reconstitute its political system the only way to do away with populism, patronage, and ethnocentrism, and enter the virtuous cycle of a state with an economy with balanced books, strong and working institutions, and a society fine-tuned to the common European norm. Greece brought debt problems on itself – this is the consequence of politicians using irresponsible fiscal policy to win elections.

If we come back to the economics, then creating a finance ministry for the European Union, that would issue debt and have responsibility for a unified financial sector, may be a good idea. It really is the eurozone as a whole that needs help, not just a couple of errant countries (Greece, Ireland, Portugal, and whoever might be next in line for market fears about its government debt and growth prospects).The eurozone has come to a crossroads:

Do they integrate more, including with generous fiscal transfers to poorer, less dynamic member countries, where people do not like to pay taxes; or do they ease some countries out of the integrated financial system, creating two tiers of participation in the euro currency area – in which some eurozone countries cannot borrow from the European Central Bank?

I suspect that the federalist intents and policies of the Brussels bureaucracy and executive will come to the fore.

| Posted by Gary Sauer-Thompson at 2:43 PM | | Comments (13)
Comments

Comments

"Athens has been told that without further austerity there can be no more aid. "

About 30 Socialist backbenchers have threatened to resign their parliamentary seats rather than vote through measures to cut thousands of public sector jobs, increase taxes again and dispose of €50bn of state assets, according to party insiders.

The wider perspective on the Greek crisis is that financial strategists do not intend to let today’s debt crisis in Europe go to waste. Their aim--as proposed by the European Central Bank (ECB)--- is to bail out the German and French banks.

That means a counter-revolution to roll back the 20th century’s gains made by social democracy: pensions and social security, public health care and other infrastructure providing essential services at subsidized prices or for free. The basic model follows the former Soviet Union’s post-1991 neoliberal reforms: privatization of public enterprises, a high flat tax on labor but only nominal taxes on real estate and finance, and deregulation of the economy’s prices, working conditions and credit terms.

The aim of financial capital aim is t to concentrate wealth at the top of the economic pyramid and lower labor’s returns. The new road is an asset grab through privatizing the assets to reduce their debt and to change their tax and expenditure systems to reduce the debt.

The key problem, as financial capital sees it, is the political will on the part of the government and parliament. Greece lacks this.

So Greece has to pay off what it owes to German bankers ($22.7 billion), French bankers ($15 billion) and the ECB (reported to be on the hook for $190 billion) by selling off public land and ports, water and sewer rights, ownership of the telephone system and other basic infrastructure.

Financial capital is beginning to demand that democratic society (Greece) yield to centralized authoritarian financial rule by experienced econocrats that re-define solvency to reflect a nation’s ability to pay debts by selling the public domain.

According to Simon Johnson at Baseline Scenario the founding assumption for the eurozone in 1999, which became a myth during the early 2000s, is that eurozone countries would converge in terms of productivity levels – to put it starkly, Greece would become very much like Germany.

In that view of Europe, it did not much matter if some countries within the eurozone ran current account surpluses while others ran large deficits. The deficit countries could finance themselves with loans from the surplus countries, the reasoning went, because they would use the money for productive investments and economic growth would allow them to keep their debt levels relative to GDP under control.

None of this happened.The productivity gains were seen more in Germany and some other North European countries; unit labor costs, reflecting the net effect of productivity gains and real wage increases, rose sharply in Mediterranean Europe.

And French, German and other “core” banks facilitated this divergence with a surge in lending to both consumers and governments in the periphery – convincing themselves, shareholders, and regulators that this was low risk. The banks convinced themselves – and their regulators – that lending to all these governments was “riskless”. This was the structural mistake at the heart of the eurozone. Greece and others were able to borrow so much relative to their economies because creditors believed this debt was very nearly just as safe as German Bunds.

The trouble is that European banks have very low levels of capital, meaning they are highly leveraged – having a great deal of debt relative to their equity. They are not in a position to withstand losses on their large portfolios of European government securities.

George Papandreou, the Greek prime minister, has admitted that he could not drive through reforms to shore up the beleaguered economy, and offered to make way for a government of national unity.

If Greece doesn't have an effective government capable of imposing the austerity measures demanded by its lenders, the game is close to up.

A wave of strikes and riots have shown how deeply unpopular the reforms are, and have reduced Athens to a smouldering mess of shattered windows and shuttered storefronts, furious during daytime riots, derelict and desolate by night.

The only alternative to financial austerity appears to be a default on Greece's large stack of loans. This is opposed by France the ECB and the European Commission. Germany wants the private banks to take a soft haircut--being forced to suffer losses on their loans.

For now it appears that a soft restructuring of Greece's debt is off the table.

Another view to that of chaos and riots in the street is that this is Greek democracy in action in Syntagma Plaza. This street democracy has its roots in the classical agora.

If austerity is resisted in Greece--because all the burden has been heaped onto taxpayers--then a restructuring of debt is inevitable.

Like Lehman Bros the central banks in the Eurozone, including the ECB and the Federal Reserve, are heavily leveraged. With honest accounting, the capital hit from a Greek restructuring could leave them with negative net worth.

The ECB perceives that its insolvency as a result of a Greek default would be a prelude to a euro crack-up and its own institutional demise. Given today’s political events:

1. Greece will not agree to the austerity measures on the table---the population see it as a form of bloodletting; the government is supposed to squeeze blood out of its population to repay the fat cat bankers.
2. Greece will default on its Euro sovereign indebtedness.

The Euro system contains a serious design flaw. It failed to recognize that it was designing a system that would cause its members to become more like Alaska, California or Utah than Australia, Canada or the US. That is, it was stripping them of their capacity to use their budgets to stabilise their own economies.The EMU members are like US states, but without a Washington to help out in times of crisis.

European banks are in trouble. Not only did they buy toxic US waste, but they also created plenty of their own. And they owe much of it to each other. Like the biggest US banks, they are “too big to fail”—which is to say that they are “systemically dangerous institutions”.

The Iceland model is to screw the bondholders and get on with life. Greece should hoist its middle finger to the owners of bank bonds, and a few other people it owes money to, and walked away.

Bond holders of clapped out banks can, and should, take losses for the greater good of the recovery.

In contrast to Iceland Ireland’s political leadership, gratuitously, decided that a nation of four million people should bail out the creditors of Irish banks even though it had no legal or moral obligation to do so and was incapable of doing so. The Irish banks’ creditors were primarily foreign banks.

In gratitude for Ireland’s equanimity, the EU imposed the equivalent of IMF sanctions on Ireland. The government is supposed to downsize and squeeze blood out of its population in order to reduce its debt load—which has thrown it into recession and reduced tax revenues.

The role of the ECB, IMF and other financial oversight agencies has been to make sure that bankers get paid. To make sure they did not lose, bankers shifted the risk onto the European “troika” empowered to demand payment from Greek taxpayers.

In the euro area, according to the ECB, debts have to be repaid and countries have to be solvent. If that means that Greece has to shut down some of its operations, like the health system, then so be it. Greece should stop the discussions about restructuring debt.”

Michael Hudson says that the Maastricht fiscal and financial rules maximize the commercial loan market by preventing central banks from supplying governments (and hence, the economy) with credit to grow.

Commercial banks are to be the sole source of financing budget deficits – defined to include infrastructure investment in transportation, communication, power and water. Privatization of these basic services blocks governments from supplying them at subsidized rates or freely. So roads are turned into toll roads, charging access fees that are readily monopolized.

Economies are turned into sets of tollbooths, paying out their access charges as interest to creditors. These extractive rents make privatized economies high-cost. But to the financial sector that is “wealth creation.”

It is unclear that Papandreou, the Greek PM, would be able to deliver on his side of the bargain: savage spending cuts and tax increases aimed at raising €28bn, combined with a €50bn privatisation programme.

Papandreou has to form a new government, win a vote of confidence and then drive the austerity package through parliament.

That is for the old bailout--the €110bn bailout, shared by the EU and the IMF, There is also a need for a new one-- around €125bn. Berlin is insisting that the banks and other private creditors holding Greek debt suffer losses as part of the rescue plan. That is being resisted.

Greece has missed the targets set in the current bailout due to a deep recession and the chronic revenue shortfall, and debt is still projected to hit 160% of GDP.

And they are being asked to take another big dose of austerity.

You can understand that the Greek people, in being asked to accept more pay cuts and state sell-offs, are convinced that more austerity will just damage their economy further. Hence the tens of thousands of citizens outside parliament.

This democracy in action sends a message of resistance to the corrupt political class that draws its authority from patronage.

The new rescue package that is now being prepared in Europe would offer Greece an additional loan of over several billion euros.

This will buy Greece some time but offer little realistic hope of recovery, given the conditions attached are another round of fiscal austerity measures, tax increases and selling off assets.

Greece’s chance of reviving its economy, and paying off its debts, looks nil. The country has to keep paying full interest and principal on an debt burden that now approaches 148 percent of GDP, and is rising.

It's a spiral downwards --unless they say no to the ECB's protection of the bankers and demand debt restructuring. They need to follow Iceland's example not Ireland's.

The streets of Athens are burning as people try to resist yet another round of austerity medicine repeatedly prescribed by the EU/IMF is forced down their throats of the Greek people by the Greek government.

They are resisting the neo-liberal assumption that it is right to socialise investment losses whilst keeping profits private.