New Perspectives On Euro Crisis And Need For Greece To Default – OpEd
Delighted though I am to see the back of Silvio Berlusconi, no one should be reassured that his replacement, the unelected technocrat and former EU commissioner Mario Monti — or another unelected technocrat, Lucas Papademos, a former vice-president of the European Central Bank., who has taken over in Greece from former Prime Minister George Papandreou — are in a position to provide a solution to the financial crisis sweeping Europe.
Even before the unelected technocrats were parachuted in, those intent on addressing the crisis through austerity cuts of unprecedented savagery had a crisis of authority, having failed to consult with the electorates of the countries involved, and imposing unelected leaders is a truly alarming development.
For those seeking to understand why, it is clear that the fault lies primarily with the entire Euro project, and not with individual countries, but understanding that involves certain Northern European countries putting aside their dreadful knee-jerk racism regarding their southern neighbours’ purported laziness and corruption, and understanding that the Euro is and was an inherently flawed project, biased in favour of the richer countries, and essentially presided over by a handful of unaccountable officials.
As the Guardian noted in an article last week, “the latest phase of Europe’s sovereign debt crisis has exposed the quite flagrant contempt for voters, the people who are going to bear the full weight of the austerity programmes being cooked up” by “the Frankfurt Group, an unelected cabal made of up eight people: [Christine] Lagarde, [the head of the IMF]; [Angela] Merkel; [Nicolas] Sarkozy; Mario Draghi, the new president of the ECB [European Central Bank]; José Manuel Barroso, the president of the European Commission; Jean-Claude Juncker, chairman of the Eurogroup; Herman van Rompuy, the president of the European Council; and Olli Rehn, Europe’s economic and monetary affairs commissioner.”
Crucially, it is also important to note that the flaws with the pan-European implementation of the Euro (as opposed to political union, which has been far more successful) only became apparent, with such disastrous results for the poorer countries, after the global banking crash of 2008, when, after an orgy of cross-border lending throughout the EU, credit dried up, jobs were lost, tax receipts plummeted, welfare bills increased, and debt — and the possibility that it might not be repaid — became a problem for those who had happily financed a decade of scandalous profligacy across the board.
To that extent, then, to echo the message of the “Occupy” movement, the 99% in Europe’s threatened economies continue to be mercilessly exploited by the 1% — and no one is safe. While David Cameron and George Osborne cynically try to blame Britain’s failing economy on the Eureopean crisis, the truth is that Britain too was hammered by the banking sector’s self-inflicted, greed-based meltdown in 2008, and has never recovered, and that blaming Europe is as miserably dishonest as believing that a savage austerity programme, based on idiotic notions that what we need is further privatisation and the destruction of the state, will not tip us further into recession.
Putting Britain aside, and returning to the crisis engulfing the Eurozone, I thought that the Economist‘s article, “A very short history of the crisis,” published last week, as part of a special report, “Europe and its currency,” was informative, and I follow it with some thoughts about Greece from the legendary BBC documentary filmmaker Adam Curtis, and some solutions to Greece’s problems from an analyst at the online magazine “Reflections on a Revolution,” which struck me as being particularly sensible.
A very short history of the crisis
The Economist, November 12, 2011
To understand the politics of the euro, it is necessary to look at its causes.
In German eyes this crisis is all about profligacy. Greece set the tone when it lied about its circumstances and lived beyond its means.
There is no disputing Greek dissipation, nor the fact that the euro zone’s troubled members, which also include Portugal, Ireland, Spain and Italy, must now pay a heavy price. But those other troubled countries were not exactly profligate. Before the crisis the governments of both Ireland and Spain ran budget surpluses. Both meticulously kept within the limits for deficits and debts set down by the stability and growth pact — unlike Germany, which flouted the rules for four years from 2003 (and avoided punishment). Nor did Italy lurch into extravagance.
Debt in these countries has become a burden not because of government profligacy but because each enjoyed a decade of low interest rates and was then hit by the financial crisis. Easy credit fuelled debt in households and the financial sector. The European Central Bank oversaw a binge of cross-border lending. In the crisis unemployment and hardship have deepened, increasing the bill for welfare. Some countries, such as Ireland and Spain, have needed to find money to prop up their banks. These new expenses fell on the state just when tax receipts collapsed — catastrophically in countries that had seen a property boom.
At the same time interest rates surged. Before the crisis investors assumed no euro-zone government would default on its debt. However, as Peter Boone and Simon Johnson of the Peterson Institute in Washington, DC, explain, Germany then signalled that defaults could happen and that investors would have to bear a share of the losses — a reasonable demand, but a hard one to introduce in the middle of a crisis. Some investors asked to be rewarded for the extra risk and others, unwilling to start paying for credit research, just walked away. This set off a spiral of falling bond prices, weakening banks and slowing growth.
Even where troubled euro-zone countries had not been profligate, they have been running unsustainable current-account deficits. Low interest rates fuelled domestic spending and spurred inflation in wages and goods, which in turn made their exports more expensive and left imports relatively cheaper. But it was also because Germany was recycling the surpluses produced by its export machine, financing their consumption.
Germany’s economy is remarkable in many ways, but it was as unbalanced as the euro zone’s peripheral economies. In their determination to save, Germans seemed to forget that in the long run the point of exports is to pay for imports. They must now regret having invested their savings abroad in American subprime mortgages and Greek government debt.
Your debt, your fault
To end the crisis, the euro zone members agreed last month to write down half of the Greek debt owned by the private sector, recapitalise Europe’s banks and boost the fund created as a firewall to protect solvent euro-zone governments. It is an ambitious plan, but Greece may need even more help and the firewall does not look strong enough to withstand a bout of contagion.
And even when the crisis has abated, restoring Europe to health will take many years. That is because the troubled countries need to control their government deficits and to re-establish sound current accounts by improving their competitiveness. Germans feel that the responsibility for this lengthy adjustment lies exclusively with borrowers, which must urgently restore budget discipline. Significantly, the German word for debt, Schulden, is the plural of Schuld, meaning guilt or fault.
However, this strategy risks being self-defeating. By pushing for immediate austerity the euro zone is deepening recession in the troubled economies, which will only make their debt harder to service. Germany’s approach suffers from a fallacy of composition. It is not possible for everyone to save their way to prosperity. As Keynes argued after the Depression, someone, somewhere must be consuming. In Europe that should be countries such as Germany and the Netherlands that were running vast current-account surpluses during the boom. But the creditors are loth to accept that they are part of the problem.
Creditor governments, most of all Germany, face a dilemma. They need to save troubled governments in order to prevent contagion. On the other hand they also want to keep up market pressure for reforms and to establish the principle that governments are on their own—so that German taxpayers will not be landed with the bill every time some EU country goes on a spending spree. So far Germany is trying to have it both ways, and succeeding only in getting everyone deeper into the mire.
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Over on the BBC blog, in the meantime, the documentary filmmaker Adam Curtis unearthed a 50-minute documentary from the archives, “Greece: The Seven Black Years,” dealing with the military dictatorship that held power from 1967 to 1974.
I do recommend you to watch the film on Adam Curtis’s blog if you have the time, but even if you don’t, I hope you find his commentary interesting. He wrote, “In the present crisis over Greece there is a furious argument about whether the Greek people should be allowed to vote on the proposed solution. Many of the voices against this come from the world of finance and economics. They say that the crisis is too dangerous to leave to the will of the people.” He adds that his discovery of the film “show[s] why some Greek politicians — and especially George Papandreou, even though he may have retreated from a referendum -and has now been shunted into the political wilderness] — might think it important to allow the people a voice.”
Curtis also noted, “[G]iven what the Greeks have been through, it is no wonder that politicians, especially Papandreou, think the mandate of the people is important. The present language of the finance technocrats, and their supporters in the media, portray the Greek people as just another group of lazy southern Europeans who have fed too long at the trough of state money.”
He added:
What is forgotten is that from 1967 to 1974 the Greek people lived under a harsh and violent dictatorship that tortured and murdered thousands of ordinary people. The Colonels also corrupted the society by handing out vast loans to individuals in towns and villages across the country — to buy their loyalty. At the same time the repression and torture bred a powerful resistance that finally burst out in incredible bravery in 1973.
This is the strange and twisted society that the present Prime Minister’s father, Andreas Papandreou, inherited when he became the newly elected leader in 1981 [and his father, it should be noted, was Prime Minister in the 1960s, before the coup]. He was faced by the task of rebuilding the peoples’ trust in democracy and the state. Partly he did it through state spending — and in that policy lie many of the roots of today’s crisis.
The discussion of Greece today in the press and the political offices of Europe is almost completely ahistorical — everything is couched in utilitarian terms of economic management. I just think it is important to put the present crisis in a wider historical context. Above all the extraordinary history of the military dictatorship and the savage effects it had on the whole of Greek society.
As well as noting that the film explains how the Generals ruled through bribery, favouritism and nepotism (as well as terror and torture), Curtis also notes that the film “builds to a very moving climax with the students who took over the Athens Technical University in November 1973 and stood against the military might of the Junta. There is extraordinary film of what then happened — and it also tells you a lot about the radicalisation of many of the Greek people today, and how important democracy is to them in the face of unelected elites who try and control them and their society. A belief in democracy born out of struggle — something that we may have forgotten.”
What I also appreciated about Adam Curtis’s commentary was his parting shot, in which he noted that “history also shows that coups don’t always happen because of a power-hungry military.” Referring to an article in the Times (which I missed because of the Internet firewall), he explained that it pointed out that “the cuts being demanded of Greece are on a scale similar to the reparations imposed on Germany by the victors at Versailles in 1919,” which is truly shocking. Curtis added, “And look what that did to the belief in democracy,” which sounds like a throwaway line, but the politicians and bankers striving to save their rigged pan-European currency project at the expense of entire economies do indeed need to think carefully about what happens to countries when they are pushed into a position of despair, and how nationalistic right-wing movements can emerge to fill the void.
As the last part of my review of the events of the last week, I came across the online magazine “Reflections on a Revolution,” and an article by the activist and economist Jérôme E. Roos, entitled, “Euro crisis unresolved: the cycle of stupidity continues,” which chimed with what I have been struggling to understand as this crisis unfolds, and which I have written about in my articles, “Crisis in Greece: Experts Call for Return of the Drachma, As Prime Minister Cancels Bailout Referendum” and “We Are All Greece: Expert Explains How the Greek Crisis is Being Manipulated by Banks and Governments to Enslave Us All” — that Greece must default and lead the flight from the Euro, and that the bankers must be severely reined in, or, as Roos puts it, “Whatever we do, we have to make sure this crisis doesn’t further embolden the bankers. Indeed, the crisis must be used to break the bankers’ backs and sever their stranglehold over our economy.”
So here, in full, are Roos’s recommendations:
For starters, the EU should immediately impose capital controls to stem the outflow of hot money, kicking speculators in the nuts and greatly diminishing the risk of financial contagion and future speculative bubbles. A Robin Hood tax on long-term financial transactions should be imposed with immediate effect to pay for the anti-social and counter-productive austerity measures currently being imposed on the people.
Greece should default on all of its foreign debt, leave the eurozone and nationalize its banks (which won’t survive a large default). This will trigger a run on Portugal, Ireland, Italy and possibly Spain as well, forcing a series of defaults and the break-up of the eurozone, unleashing a major financial crisis in Europe’s crazily over-leveraged banking system. But at least these countries will then be able to to devalue and print their own currency, ramp up public investments, boost unemployment and avert a social disaster.
The countries of the core should allow their banks to fail (underwriting deposits up to a certain amount to make sure the average citizen is not affected), perhaps nationalizing the banks that are considered “too big to fail”, restructuring them into small, cooperatively-owned credit unions. The European Central Bank should pursue an expansionary monetary policy to make up for the credit squeeze induced by private bank failures. Germany and the Netherlands will oppose this. Screw them. Time to move South.
The previous two arrangements will render the EFSF [the European Financial Stability Facility] largely irrelevant. But European nations will now be stuck with even higher sovereign debt levels as a result of the bank nationalizations and collapse of tax receipts induced by the inevitable collapse in output that will follow the break-up of the eurozone. Sorry for all of you de-growthers out there, but for now, the only way out of overwhelming debt and mass unemployment remains through growth. Public investment facilities will need to be set up to boost employment and fund the transition towards a sustainable economy.
And here’s that concluding paragraph in full:
Whatever we do, we have to make sure this crisis doesn’t further embolden the bankers. Indeed, the crisis must be used to break the bankers’ backs and sever their stranglehold over our economy. Once that is done, we can finally start considering how to build an alternative model of democracy that truly reflects the will of the people, returning power to the masses and ensuring a future based on social justice, cooperation and sustainability. It’s just an idea, you know.
