June 18, 2011
The Guardian Unlimited, June 17, 2011
Imagine that in the worst year of our recent recession, the United States government decided to reduce its federal budget deficit by more than $800 billion dollars – cutting spending and raising taxes to meet this goal. Imagine that, as a result of these measures, the economy worsened and unemployment soared to more than 16 percent, and then the president pledged another $400 billion in spending cuts and tax increases this year. What do you think would be the public reaction?
It would probably be similar to what we are seeing in Greece today, including mass demonstrations and riots, because that is what the Greek government has done. The above numbers are simply adjusted for the relative size of the two economies. Of course the U.S. government would never dare to do what the Greek government has done – recall that the budget battle in April that had House Republicans threatening to shut down the government resulted in spending cuts of just $38 billion.
What makes the Greek public even angrier is that their collective punishment is being meted out by foreign powers – the European Commission, European Central Bank (ECB), and the International Monetary Fund (IMF). This highlights perhaps the biggest problem of unaccountable, right-wing, supra-national institutions. Greece would not be going through this if it were not a member of a currency union. If it had leaders that were stupid enough to massively cut spending and raise taxes during a recession, those government officials would be replaced. And then a new government would do what the vast majority of governments in the world did during the world recession of 2009 – the opposite, i.e. deploy an economic stimulus, or what economists call counter-cyclical policies.
And if that required a renegotiation of the public debt, that is what the country would do. This is going to happen even under the European authorities, but first they are putting the country through years of unnecessary suffering, and taking advantage of the situation to privatize public assets at fire sale prices and restructure the Greek state and economy so that it is more to their liking.
I have maintained for some time that the Greek government has had more bargaining power than it has used, and the past week’s events seem to confirm this. Because of the massive opposition to further economic self-destruction – the latest polls show that 80 percent of Greeks are opposed to making any more concessions to the European authorities – the Greek government has so far been unable to reach an agreement with the IMF for the release of their latest loan tranche on June 29. So what happened? The IMF is going to hand over the money anyway, while the European authorities (who are in control of IMF decision-making on matters of Greek economic policy) continue to quarrel over how long they will postpone Greece’s inevitable debt restructuring, roll-over, or whatever they choose to call it.
That’s because the prospect of a disorderly default – as would be triggered by the IMF simply sticking to its program and not lending Greece the money – is too scary for the European authorities to contemplate. For this reason the many news articles about the possibility of a financial collapse comparable to what happened after Lehman Brothers went under in 2008 are somewhat exaggerated. The European authorities are not going to let that happen over a measly $17 billion loan installment. The events of the past week were all a game of brinkmanship, and the European authorities had to blink because the Greek government, as much as it wanted to, couldn’t get approval for the deal.
A democratically accountable Greek government would take a much harder line with the European authorities. For example, they could start with a moratorium on interest payments, which are currently running at 6.6 percent of GDP. (This is a huge interest rate burden, and the IMF projects it to increase to 8.6 percent by 2014. For comparison, despite all the noise about the U.S. debt burden, net interest on the U.S. public debt is currently at 1.4 percent of GDP.) That would release enough funds for a serious stimulus program, while they negotiate with the authorities for the inevitable debt write-down. Of course the European authorities – who are looking at this from the point of view of their big banks and creditors’ interests generally — would be enraged, but at least this would be a reasonable opening bargaining position.
The IMF’s latest review of its agreement with Greece suggests that the Euro, for the Greek economy, is still 20-34 percent overvalued. This makes a recovery through “internal devaluation” – i.e., keeping unemployment so high and therefore lowering wages to make the economy more internationally competitive – an even more remote possibility than it would otherwise be. But the big problem is that the country’s fiscal policy is going in the wrong direction, and of course they cannot use monetary policy because that is controlled by the ECB.
The European authorities have more than enough money to finance a recovery program in Greece, and to bail out their banks if they don’t want them to take the inevitable losses on their loans. There is no excuse for this never-ending punishment of the Greek people.