by Michael Roberts
So Greeks have voted NO by a significant majority in the
referendum on the Troika conditions for bailout funds to repay Greek
government debt. Given the scare tactics of the EU Commission and the
German politicians, the might of Greek pro-capitalist media noise and
the closure of the banks making it difficult, if not impossible, to
conduct daily business, the majority ‘no vote’ is a huge defeat for the
Troika and big capital in Europe; and a victory for the Greek people and
But, in a way, the result of the Greek referendum does not make any
difference to dealing with the problems ahead. Tsipras and Varoufakis
say that the vote will now enable them to negotiate a better deal with
the Troika for a new bailout package that will, they hope, include some
But that assumes the Troika will be prepared to negotiate at all with
Look at this comment from German economy minister Sigmar
Gabriel (a social democrat!) who told the Tagesspiegel newspaper that
this no vote makes it hard to imagine talks on a new bailout programme
with Greece. And he accused Alexis Tsipras of having “torn down the last bridges” which could have led to a compromise: “With
the rejection of the rules of the euro zone …negotiations about a
programme worth billions are barely conceivable,….Tsipras and his
government are leading the Greek people on a path of bitter abandonment
Even if they do, they may not offer any better conditions. Remember,
Syriza had already agreed to raising social security contributions and
VAT, to reducing pensions over time and to privatisations across the
board (see my post https://thenextrecession.wordpress.com/2015/04/28/greece-crossing-the-red-lines/).
To quote Larry Elliot in the Guardian: “Greece’s membership of
the euro hangs by a gossamer thread after the victory for the no side in
the country’s referendum. The cash machines are running out of money
and the economy is in freefall. The fate of the home of democracy is not
in its own hands. If it chooses to do so, the European Central Bank
could force Athens to default on its debts and issue its own currency on
Monday morning by withdrawing emergency support for the Greek banking
And “Whether they will do so remains to be seen. Indeed, the
relentless mishandling of Greece ever since the crisis first flared up
in 2010 suggests that blunder will follow blunder. It doesn’t help that
relations between Greece and the other 18 members of the euro zone are
now so sour. The chances of Greece leaving the euro by mistake, just as
Lehman Brothers went bust by mistake in 2008, are reasonably high.”
But longer term, the real issue is that Greece’s public and private
debt burden is just too large for the Greek capitalist economy to
service, despite already squeezing Greek labour to the death –
literally. The Greek public debt burden arose for two main reasons.
Greek capitalism was so weak in the 1990s and the profitability of
productive investment was so low, that Greek capitalists needed the
Greek state to subsidise them through low taxes and exemptions and
handouts to favoured Greek oligarchs. In return, Greek politicians got
all the perks and tips that made them wealthy too.
This weak and corrupt Greek economy then joined the euro and the
gravy train of EU funding was made available and German and French came
along to buy up Greek companies and allow the government to borrow and
spend. The annual budget deficits and public debt rocketed under
successive conservative and social democratic governments. These were
financed by bond markets because German and French capital invested in
Greek businesses and bought Greek government bonds that delivered a much
better interest than their own. So Greek capitalism lived off the
credit-fuelled boom of the 2000s that hid its real weaknesss.
But then came the global financial crash and the Great Recession. The
Eurozone headed into slump and Eurozone banks and companies got into
deep trouble. Suddenly a government with 120% of GDP debt and running a
15% of GDP annual deficit was no longer able to finance itself from the
market and needed a ‘bailout’ from the rest of Europe.
But the bailout was not to help Greeks maintain the living standards
and preserve public services during the slump. On the contrary, living
standards and public services had to be cut to ensure that German and
French banks got their bond money back and foreign investment in Greek
industry was protected.
When it was suggested that German and French banks should take the
hit, the ECB president at the time of the first bailout, Trichet
responded that this would cause a banking meltdown as Lehman’s had done
in the US in 2008. He “blew up,” according to one attendee. “Trichet said, ‘We are an economic and monetary union, and there must be no debt restructuring!’” this person recalled. “He was shouting.”
By this, he meant no losses for the banks as ‘reckless creditors’,
instead the Greeks must take the full burden as the ‘reckless
So through the bailout programmes, foreign capital was more or less
repaid in full, with the debt burden shifted onto the books of the Greek
government, the Euro institutions and the IMF – in other words,
taxpayers. Greece was ultimately committed to meeting the costs of the
reckless failure of Greek and Eurozone capital.
The Troika’s plan was to make the Greeks pay at the expense of a 25%
fall in GDP, a 40% drop in real incomes and pensions and 27%
unemployment rate. The government deficit was turned into a ‘primary
surplus’ within the shortest period of time by any modern government.
Greece has reduced its fiscal deficit from 15.6 percent of GDP in 2009
to 2.5 percent in 2014, a scale of deficit reduction not seen anywhere
else in the world. Total public sector employment declined from 907,351
in 2009 to 651,717 in 2014, a decline of over 255,000. That is a drop of
over 25%. Greece has gone from one of the lowest average retirement
ages to one of the highest. In this sense, Greece had undertaken the
most significant pension reform in Europe even before the latest demands
of the Troika. This was austerity at its finest.
But the horrible irony is that this policy failed. Far from
recovering, the Greek capitalist economy went into a deep depression.
The supposed export-led economic recovery did not materialise. Instead
the austerity measures have only made things worse.
So whatever the vote in the referendum, Greece cannot pay back the
public sector debt, 75% of which is owed to the Troika of the Eurozone
loan institution (EFSF) , the IMF and the ECB. And with the banks closed
and credit withdrwan by the EB and the rest of European capital, the
economy is in meltdown.
That the debt cannot be repaid is now openly admitted by the IMF in
its latest debt sustainability report on Greece (here). The IMF now
recognises that it got its forecasts of recovery hopelessly wrong.
Now, in its new report, the IMF reckons that the creditors must write
off debt equivalent to at least 30% of Greek GDP to even begin to be
able to sustain its debt servicing without default. As it puts it, “It
is unlikely that Greece will be able to close its financing gaps from
the markets on terms consistent with debt sustainability. The central
issue is that public debt cannot migrate back onto the balance sheet of
the private sector at rates consistent with debt sustainability, until
debt-to-GDP is much lower with correspondingly lower risk premia”. Of course, any write-off must be on loans already made by the Euro Group. The IMF and ECB still expect to paid back in full!
Why cannot the debt on the Greek government books be serviced and
repaid in full? It’s very simple. The Greek capitalist economy is just
too weak, too inefficient and too unproductive to grow fast enough.
Greek wages have been slashed, public sector spending has been cut
savagely, pensions have been reduced sharply. Plans to improve tax
collection and end avoidance and evasion are being put in place. But by
IMF estimates, tax revenues will still not be enough to deliver a
sufficiently large surplus before interest payments on existing debt for
Greece to pay down its debt. Indeed, the IMF estimates are probably way
too optimistic and the level of debt haircuts on the Euro institutions
should be much higher than the IMF estimates.
So if the Syriza government or any other Greek combination government
is forced into a new ‘bailout’ package in order to try and get the
government to service its debt, the Alice in Wonderland scenario of more
loans to pay for previous ones will continue – a true Ponzi scheme The
more austerity and cuts in living standards are applied, the more
difficult it will be for Greek capitalism to grow.
Whether there is now a deal with the Troika or alternatively, Grexit,
the Greek economy needs to grow. Onlty this can make any public or
private debt burden disappear. Take the US. The US public sector debt is
huge at nearly 100% of GDP. But the US can service that debt easily
because it has nominal GDP growth of just 4% a year. And the interest
costs on its debt are very low at just 3% a year. As growth is higher
than the interest cost on the debt, the US government can run a deficit
of taxes versus spending (before interest) of 1% of GDP a year, and its
debt ratio will still stay stable (but not fall).
Greece, on the other hand, in 2011, had interest costs of over 4% on
its debt and nominal GDP of -5% a year, so it needed a government
surplus of 9% of GDP just to keep the debt from rising. The government
was applying austerity but still a deficit. Even the small debt
restructuring of 2012 in the second bailout program did not stop the
rise in the debt ratio. It is still rising.
In the 2012 bailout package, the Euro group agreed to put off
repayment of its loans until 2022 and reduce the interest payments on
them to just 2%. So, to stabilise the debt, the Greek economy now needs
to grow by only 2% a year in nominal terms and balance its budget. But
it cannot even do that yet. And even if it could, that would mean the
debt ratio would just remain at 180% of a still contracting Greek GDP.
So everything depends on restoring growth, much faster growth. That
means more investment, new jobs, rising incomes and tax revenues and the
ability to pay debt.
How can the Greek economy be made to grow? There are three possible
economic policy solutions. There is the neoliberal solution currently
being demanded and imposed by the Troika. This is to keep cutting back
the public sector and its costs, to keep labour incomes down and to make
pensioners and others pay more. This is aimed at raising the
profitability of Greek capital and with extra foreign investment,
restore the economy. At the same time, it is hoped that the Eurozone
economy will start to grow strongly and so help Greece, as a rising tide
raises all boats. So far, this policy solution has been a signal
failure. Profitability has only improved marginally and Eurozone
economic growth remains dismal.
The next solution is the Keynesian one. This means boosting public
spending to increase demand, introducing a cancellation of part of the
government debt and leaving the euro to introduce a new currency
(drachma) that is devalued by as much as is necessary to make Greek
industry competitive in world markets. This solution has been rejected
by Troika, of course, although we now know that the IMF wants ‘debt
relief’ at the expense of the Euro group (ie Eurozone taxpayers).
The trouble with this solution is that it assumes Greek capital can
revive with a lower currency rate and that more public spending will
increase ‘demand’ without further lowering profitability. But the
profitability of capital is key to recovery under a capitalist economy.
Moreover, while Greek exporters may benefit from a devalued currency,
many Greek companies that earn money at home in drachma will still be
faced with paying debts in euros. Many will be bankrupted. Already over
40% of Greek banks loans to industry are not being serviced. Rapidly
rising inflation that will follow devaluation would only raise
profitability precisely because it will eat into the real incomes of the
majority as wages failed to match inflation. There would also be the
loss of EU social funding and other subsidies if Greece is also ejected
from the EU and its funding institutions.
Eventually, perhaps in five or ten years, if there is not another
global slump, either the first or second solution can restore the
profitability of Greek capital somewhat, on the back of a Eurozone
economic recovery. But it will be mainly at the expense of Greek labour,
its rights and living standards and a whole generation of Greeks will
have lost their well-being (and their country as they go elsewhere in
the world to make a living). Both these solutions mean that Greek labour
will still be poorer on average in 2022 than it was in 2008.
The third option is a socialist one. This recognises that Greek
capitalism cannot recover to restore living standards for the majority,
whether inside the euro in a Troika programme or outside with its own
currency and no Eurozone support. The socialist solution is to replace
Greek capitalism with a planned economy where the Greek banks and major
companies are publicly owned and controlled and the drive for profit is
replaced with the drive for efficiency, investment and growth.
The Greek economy is small but it is not without an educated people
and many skills and some resources beyond tourism. Using its human
capital in a planned and innovative way, it can grow. But being small,
it will need like all small economies, the help and cooperation of the
rest of Europe.
The no vote at least tells the rest of European labour that the
Greeks will resist the demands of European capital. That could
encourage others in Europe to throw out governments in Spain, Italy and
Portugal that continue to impose austerity at the dictate of the
Troika. That, in turn, could bring to a head the future of the
Eurozone as a Franco-German project for capital.
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