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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.
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.
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"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.