Greece and the Eurozone Crisis

Feb 17, 2015 Comments Off on Greece and the Eurozone Crisis by

Note: this is an update to my shortly-to-be-published book Credo: Economic Beliefs in a World in Crisis.

The Syriza government has been elected to power in Greece with an electoral mandate to end the austerity policies imposed on Greece by the European Union, the IMF and the European Central Bank.

The first point to make about this is the obvious one that a government that has power to issue a national currency of its own can always cover a deficit – an excess of spending over tax revenues. This is because, in the end, it can print money to make up the difference. (Or, if you like the government can issue bonds and the central bank can create money to buy them). Countries entering the Eurozone lost this power and with the replacement of the Greek Drachma with the Euro so did Greek governments. The Maastricht Treaty is explicit on this – Eurozone governments cannot be funded by money creation by their own central banks. Money creation is a prerogative of the private banks in Europe, and of the European central bank . If states get into financial difficulties they can get loans, but on conditions. The conditions are taking steps to balance tax revenues and government expenditure.

With the benefit of hindsight it seems almost inevitable that Greece would fall foul of Eurozone financial rules because it had been running a government deficit since 1973 and very high deficits since the early 1980s. Much of government expenditure was used to pay for a very large military budget. After the USA, Greece spent a higher % of its GDP on the military than any other country in NATO. This is partly because of enmity with Turkey but it might also have something to do with keeping the military types happy given that Greece had emerged from a military dictatorship – so the soldiers were given lots of high tech toys to keep them sweet. A lot of these toys were bought from German arms companies who did not complain.

At the same time economic development in Greece was limited mainly to tourism and shipping. Against larger northern European nations, particularly Germany, there was little chance of competing in most forms of industrial production. Instead Greek governments used money to provide public sector jobs, generous pensions and social benefits in a form of “development” that, with hindsight, was never going to be long run sustainable. At the same time many of Greek people, like many the populations in other countries absorbed the idea that the good life was all about self-display, leisure and consumption – an idea that they might have got partly from the stream of tourists from northern Europe to whom they catered.

One commentator has described how the development model was “underpinned by a historically influenced mentality in which property counted for more than work and people admired people who possessed wealth for which they had not had to work”.[1]

In other words the inflated state was associated with a system of patronage – not unlike the systems of well connectedness between business and state that characterise most other “developed countries” – the USA, UK, Germany.

However, all clubs of power not only have insiders but they are formed over and against everyone else – and in Greece the young people excluded by this corrupt club of power organised in resistance against it. It is this that explains the rise of Syriza as a new political force. What we are witnessing with the new government in Greece is a political transformation that is also a generational change.

What has brought this about has been the radicalisation of the population as a result of a humanitarian crisis in which the old “development model” collapsed.

When they entered the Eurozone Greek governments could not continue as before. By joining the Eurozone at the rate of exchange that they did the Greek people got a lot of Euros for their converted drachma and thus plenty of purchasing power to buy lots of imported consumption goods from abroad at very favourable prices. Interest rates were also low.

Times were good – but not for long. The short Euro honeymoon prepared the collapse. The excess of imports over exports can be thought of as an “export of their purchasing power” to northern Europe and a corresponding worsening of the competition situation of the Greek economy. This made the government deficit even worse too – while Greek purchasing power was helping to boost the German economy, it was not flowing back into the Greek economy, and not flowing into domestic tax payments.

The solution which governments used was to disguise what was going on was fiddling the statistics. They fell into a deadly embrace with international financial sharks like Goldman Sachs which, with other banksters, received generous fees for disguising the true extent of the borrowing. Loans were disguised as swaps.

The global financial crisis of 2007/2008 brought the real situation out into the open with the inevitable crisis and recession. With falling tax revenues and rising government expenditure the state financial crisis got worse. The extent of the fiscal fraud was revealed. Nevertheless it was still possible in 2010 for the Greek government to refinance their deficit by again borrowing mainly from European and international banks – albeit at much increased rates of interest. Paying these very high rates of interest then made the government deficit even worse. As so often happens in economics a self reinforcing vicious spiral was occurring.

The subsequent bail out loans made available to Greece by the European Union were mainly used to pay off these bank loans – with only a part going to cover an underlying deficit (ie the part that did not include servicing and repaying bank debt). It was thus not  “Lazy greeks” who were being bailed out  but the banks of Germany, France and Holland. However the ordinary people of Greece were now on the hook to pay back European taxpayers whose governments had made available taxpayer money so that European banks did not make a loss.

The austerity policies imposed in Greece have, in turn, produced a humanitarian crisis and a collapse in its national income. Unsurprisingly, a country whose national income has fallen by 25% is even less able to pay its taxes and its debts and a new political force has been elected to reject a policy direction that is both futile and creating massive distress.  

One of the themes of my book is that of bias – economic textbooks claim that economists describe the world as it is rather than describing the world as it should be. There is a claim that economists are aware of the “fact” – “Value” distinction and that they stick to the facts rather than express their values.

Unfortunately, “bias” is not so easily banished as that. When you try to explain the world it involves a choice of where to look for explanations, as well as a choice of the directions and issues you do not to look at. In a political-economic crisis there are conflicts and thus at least two points of view. There are at least two ways of explaining things. Typically the two explanatory narratives have little in common and are about different things. What then happens is that people are pressured to take sides and exposed to arguments where protagonists reduce the complexity of the situation dramatically – this is particularly the case when the public relations industry and the popular press seek to simplify. Then it becomes “Lazy Greeks who will not pay their debts” versus “Greedy bullying Germans”.

If it is almost impossible to avoid “bias” one can at least be explicit about where one is coming from. What interests me, since economics is supposed to be about wellbeing, is the measurement of wellbeing through public health data. When we use public health data to look at the Greek situation what is immediately clear is that there is a “humanitarian crisis”. Instead of measuring wellbeing with a nebulous idea of “happiness” we can use instead use actual mental health data – with statistics for suicides and depression telling us what is going on in .

In this regard firstly, the prevalence of major depressive disorders in Greece has more than doubled from 2008 to 2011, with people facing serious economic problems being most at risk [2]

Secondly increasing numbers of people are killing themselves. A study published in the British Medical Journal tells us that:.

“In 30 years, the highest months of suicide in Greece occurred in 2012. The passage of new austerity measures in June 2011 marked the beginning of significant, abrupt and sustained increases in total suicides (+35.7%, p<0.001) and male suicides (+18.5%, p<0.01). Sensitivity analyses that figured in undercounting of suicides also found a significant, abrupt and sustained increase in June 2011 (+20.5%, p<0.001). Suicides by men in Greece also underwent a significant, abrupt and sustained increase in October 2008 when the Greek recession began (+13.1%, p<0.01), and an abrupt but temporary increase in April 2012 following a public suicide committed in response to austerity conditions (+29.7%, p<0.05). Suicides by women in Greece also underwent an abrupt and sustained increase in May 2011 following austerity-related events (+35.8%, p<0.05). One prosperity-related event, the January 2002 launch of the Euro in Greece, marked an abrupt but temporary decrease in male suicides (−27.1%, p<0.05).”[3]

So let’s be clear on that. Suicides went down when the euro was introduced and went up – not only when the recession started (suicide rates went up all over the world during the recession) but also particularly when the austerity policies were introduced.

In a recession all sorts of people suffer – including some of the rich. Austerity policy induced poverty is, however, particularly directed at those who are most vulnerable. It is those who are most vulnerable that are reliant on others and on the state, so their needs are downgraded. The attack on vulnerable people is to find the resources to save those who are “too big to fail” – particularly the banks.

Austerity policies are also an attack on ordinary people because austerity is not just about economic resources, it is also an exercise in social psychology. Austerity also has elements of scapegoating. In an economic crisis a society is undergoing an immense amount of anger, fear, tension and distress. This is dangerous for the elite that has taken the society into this crisis and the emotions from the crisis must be re-directed away from them. A lot of those negative feelings are thus directed downwards, on more vulnerable people in a process of emotional displacement – in a word in scapegoating.

We have seen similar things in the UK and many countries – groups like disabled people, migrants become targets for the hatred and distress generated as people seek to manage the practicalities of their lives and relationships under more difficult conditions. Powerful emotions are generated and people wonder “who is to blame?”. Governments keen to divert discontent away from themselves work with the media to fix on groups who cannot fight back.

In my book I also described the way in which particular groups of people are pre-disposed to see “the solution” to economic problems as being in pushing around more vulnerable people – “loyal bullies” I call them. Loyal bullies get a chance to persecute people through austerity policies which appear to be exercising greater control, for example over benefit “scroungers and cheats”. An explicit ideology emerges that sees the problems of society in a lack of discipline and cheating and finds the apparent solutions in bullying, bureaucratic harassment and forms of violence. It creates growing fascist tendencies among people, petty autocrats in state bureaucracies and in the police and armed forces. In Greece this has led to the development of groups like “Golden Dawn”.

It is thus no wonder in circumstances like this that mental health problems are on the rise.

Another indicator of the crisis in Greece has been a rising trend in infant mortality which increased by 43% between 2008 and 2012.

One of the main themes of my book is that those who bear the worst consequences of economic crises are rarely the people responsible for bringing that the crisis about. The most powerful people are protected by their wel- connectedness, their favoured client status and access to friends in high places – whether in political office at home (in Greece) and abroad (in international political and financial centres) . They can get themselves bailed out or protected. That’s why responses to economic crises are all about shifting burdens downwards onto more vulnerable people.

You could not get more dramatic evidence in the Greek case than rising infant mortality – obviously infants and children have no role in economic policy formation yet in increasing numbers they pay for austerity with their lives. “Sustainability”, of course, is supposed to be about the rights of future generations – but the evidence shows that the policies increase the chance of children dying before you reach adulthood. Of course most children do survive but when they try to enter the labour market in Greece young people have found that there are no jobs for them. In 2014 youth unemployment was averaging over 50%.

When the IMF and financial technocrats visit a country you can expect a number of things – income will fall, unemployment will rise and the local healthcare system will be attacked.[4]

As a matter of fact, as a proponent of degrowth I actually do see a need for economic contraction – but austerity has a number of features that make it very different from degrowth. Austerity is about attacking the poorest, the weakest and most vulnerable – as well as asset stripping publically owned assets by forcing privatisation on governments in crisis. In Degrowth it would be those who can afford to bear the cuts who would do so while attempts are made to help the most vulnerable cope with the economic contraction. However, this is difficult to achieve in today’s globalised world since, if governments take steps against the rich and well-connected, this elite group have a large number of ways to put their money out of reach.

At the same time as the crisis in Greece was back into the news it was being revealed how the HSBC bank had been helping rich people all over the world avoid tax by setting up swiss bank accounts to put their money in them. Places like the city of London and its associated network of tax havens are all about helping rich people put their money out of reach. That means that when the Greek ruling elite felt threatened they took their money abroad. The technical term is “capital flight”.

Just how huge the sums of money involved are can be seen graphically. A look at this graph reveals that in just a few months in 2010 capital flows out of Greece were roughly of 60% of the 2014 GDP while another 30% was taken out the country in 2011. In the last 5 months of 2014 money was again leaving the country at the rate of 12% of GDP.

If you want to balance a state budget then who exactly is it that has the pockets deep enough to pay taxes with? It is the people responsible for this kind of capital flight. It is that money, shifted out of the country, that needs to be targeted. Successive Greek governments had no intention of doing that – it would have involved taking action against their cronies. In any case they did not have an administrative machinery to do it with. This is what they lost when Greece joined the euro since there can be no exchange control between countries to prevent money moving from one part of the Eurozone to another. Successive governments squeezed ordinary people and the Greek welfare state instead – and were put under pressure to put publically owned assets for sale to global financiers at a knock down price.

The results of this are entirely predictable. When people are impoverished – in the case of Greece losing 25% of GDP – they are less able to pay their debts and their taxes, not more. The debt situation has spiralled out of control and a humanitarian crisis was created. However the next act in this drama has been the election of a government of outsiders who are not part of the crony circle – with a mandate to oppose austerity in order to end the humanitarian crisis.

What happens next?

One thing we can be sure about – neo-liberal politicians in the financial centres over the world want to see Syriza fail. If Syriza are successful they will inspire people throughout southern Europe and Ireland – not to mention any other government under the thumb of the IMF. They will also want to see Syriza fail because Syriza have only one option for reform – to clean up the old corrupt elite and tax where the resources really are. There are policies that could be deployed – like land valuation taxation which would be hard to evade. But policies have to be set up. Administrative machinery has to be created and corruption rooted out. This takes time – and the new Greek government does not have time. Money is being withdrawn from the banks and from the country. To prevent that requires capital controls that the government does not have access to under European union rules. The government will run out of money shortly – and again it cannot create money under European Union rules. The kind of action that the Greek government has to take will be opposed by financial and political elites the whole world over – a new generation of outsiders, who are not compromised and co-opted, is a genuine nightmare and they must be shown to fail.

That is why I find it difficult to believe that European politicians will give any leeway or support to Greece. If Greece were now to exit the Eurozone the process would be chaotic so if I were a politician in Greece I would be playing for time and doing what Argentinian local authorities did – paying the bills with low denomination IOUs which can effectively function as a currency alongside the Euro (Patacones).Then, if the eurozone authorities rule against the Greek government’s actions it would be the European authorities that have slung Greece out and, further, an alternative quasi currency would already be in circulation.

Greek exit from the eurozone would not be painless for the Greeks because it would probably mean a devaluation of the new currency of perhaps 40%. Imported goods would be 40% more expensive. However, the experience of other countries like Argentina is that a devaluation of this sort can lead to an economic recovery. This would give the Greek government time to start working on cleaning up the corruption of the old elite. The new generation could settle in to do their job properly.

In the rest of Europe this would set a number of processes running. It is being said that Grexit would not now lead to a financial crisis as the larger European banks and financiers are no longer so exposed and Greece is, after all, one of the smaller countries in Europe.

Perhaps – however they underestimated the impact of letting Lehman Brothers go bankrupt badly. Even if the financial repercussions are small – the political repercussions in other countries in a similar situation to Greece would be huge.



3. Branas et al “The impact of economic austerity and prosperity events on suicide in Greece: a 30-year interrupted time-series analysis” 2nd February 2015

Featured image: money in sock. Source: Author: Uros Kotnik

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About the author

Brian Davey trained as an economist but, aside from a brief spell working in eastern Germany showing how to do community development work, has spent most of his life working in the community and voluntary sector in Nottingham particularly in health promotion, mental health and environmental fields. He helped form Ecoworks, a community garden and environmental project for people with mental health problems. He is a member of Feasta Climate Working Group and former co-ordinator of the Cap and Share Campaign. He is editor of the Feasta book Sharing for Survival: Restoring the Climate, the Commons and Society, and the author of Credo: Economic Beliefs in a World in Crisis.

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