Unpayable debts, a catastrophic economic depression and teetering on the brink total collapse. How did Greece get into this position?
The most popular answer is that public spending has been too high, and the government sector bloated. It sounds plausible when the entire story revolves around debt. After all, everyone knows that debt is the result of spending more than you earn. Yet it isn’t so straightforward.
The Organisation for Economic Cooperation and Development noted in 2011: “Greece has one of the lowest rates of public employment among OECD countries, with general government employing just 7.9 percent of the total labour force in 2008 … Across the OECD area, the share of government employment [averages] 15 percent.”
Eurostat estimates that Greek government expenditure, as a proportion of GDP, is higher than the European average. However, one of the findings of last month’s preliminary report of the Truth Committee on Public Debt, established by the Hellenic Parliament and coordinated by Eric Toussaint, is that public expenditure in the decades leading up to the crisis was lower than that of other euro area members (i.e. those members of the EU that have adopted the euro currency). “From 1995 to 2009 the average [government] expenditure is lower in Greece (48 percent) than in euro area countries (48.4 percent)”, it says.
The report estimates that most of the country’s total debt was accrued in 1980-93 and that its increase was “clearly related to the growth in interest payments” demanded by creditors, which it terms the “snowball effect”, rather than government largesse. “Between 1980 and 2007, the debt-to-GDP ratio increased by 82.3 percentage points … Two-thirds of this change is attributable to the ‘snowball effect’ and only a third to the cumulative deficits”, it says. (The budget deficit or surplus is the difference between government revenues and expenditure.)
The report also raises questions about the legitimacy of a significant upward revision of the debt and deficit figures after the election of George Papandreou’s PASOK government in 2009. At the time, we were told that successive governments, in collaboration with the investment bank Goldman Sachs, had systematically hidden the full extent of government borrowing. The newly-elected PASOK revised the 2009 deficit projection from 3.7 percent of GDP to nearly 12.5 percent (it later was revised upwards again). The debt estimate was lifted by €28 billion.
The Hellenic statistical authority did have a history of underreporting. Current Syriza finance minister Yanis Varoufakis wrote in 2011 of the revisions: “My hunch is that, after ‘Greek statistics’ had become the world’s laughing stock, it was natural, and indeed, prudent, to err on the side of caution and pessimism”.
The Truth Committee, however, charges that systematic falsification of the statistics was undertaken as part of a “dramatisation of the budget and public debt situation. This was done in order to convince public opinion in Greece and Europe to support the bailout of the Greek economy in 2010 with all its catastrophic conditionalities for the Greek population”.
After 1993, there was a “quasi-stabilisation” of the debt-GDP ratio; it rose from 91 percent to 103 percent. Yet economic growth was motoring at an average of more than 4 percent per year from 1997 to 2007. The nominal value of loans therefore was increasing quickly. However, it was the creditors taking the lead in an aggressive lending spree. As Pratap Chatterjee writes at US websiteCommonDreams.org:
“While it’s true that corrupt Greek politicians borrowed billions for shaky government schemes from [European] banks, there was a very good reason that the financiers made these rash loans: they were under pressure from European Union bureaucrats to compete in a global marketplace with UK and US banks …
“The European Union was firmly behind this since they wanted European entities to compete on a global stage … But French banks knew that they could not make billions by competing in Germany, nor were German banks expecting to vanquish the French. They looked instead to a simpler and easier market to loan out the plentiful supply of cash they had – the poorer, mostly southern European states that had agreed to take part in the launch of a common currency called the Euro in 1999.
“The logic was clear: In the mid-1990s, national interest rates in Greece and Spain, for example, hovered around 14 percent, and at a similar level in Ireland during the 1992–1993 currency crisis. So borrowers in these countries were eager to welcome the northern bankers with seemingly unlimited supplies of cheap cash at interest rates as low as one to four percent.”
The debt was manageable. Only when the house of cards that was the North Atlantic financial system came tumbling down did the Greek tragedy unfold. In 2008, the country entered a GFC-induced economic recession. Government revenues dropped 15 percent through 2009. The decline, along with bailouts for financial institutions, increased the budget deficit, though not dramatically. Yet it proved to be the beginning of the end.
The strangulation of the Greek economy
As Papandreou’s revisions were announced, speculators began gambling on a default. Foreign banks demanded higher returns on money loaned to the Greek government; ratings agencies began to mark down Greek bonds to junk status. By April 2010, the private market had essentially frozen. Loans now had to come via bailout loans primarily from the European Financial Stability Facility (which was set up in 2010 as an emergency crisis mechanism) but also from individual EU member states, the European Central Bank (ECB) and the International Monetary Fund (IMF).
The situation was particularly ironic. Greece had been one of the first countries to guarantee the stability of its private banking system as the financial crisis swept Europe in 2008. An October 2008 €28 billion package to guarantee all deposits and debts was replicated in larger figures across the continent. Over the next 6 months, an estimated €3 trillion was pledged by governments to stabilise the European financial sector. A year later, the institutions that had been the beneficiaries of public bailouts again turned predatory, as they had been when dispensing loans in the lead up to the crash. Greece wasn’t the only victim, but it was the biggest.
On 3 May, PASOK signed a “Memorandum of Economic and Financial Policies”, which was the basis for European Commission (the executive arm of the EU), ECB and IMF (known as “the troika”) oversight of an austerity-driven structural adjustment of the Greek economy. In return, the euro area countries and the IMF provided €110 billion for a three-year bailout package.
Papandreou already had delivered two sweeping austerity budgets. The bailout was agreed to on the proviso that a third austerity program be implemented. Passed by the parliament at the end of June, the measures were unprecedented in scale. They included raising by four years the retirement age for public servants and cutting salaries by 15 percent; an 8 percent cut in allowances; a rise in the VAT (a consumption tax); a minimum wage cut of 15 percent; and the proposed sell-off of two-thirds of public companies. The ECB, which had dictated the policy, showered praise on its adoption:
“The European Central Bank welcomes the economic and financial adjustment programme which was approved today by the Greek government … The ambitious fiscal adjustment and comprehensive structural reforms under the programme are appropriate to … [stabilise] the fiscal and economic situation over time.”
Over the next three years, four further austerity packages were announced, further slashing public sector wages, pensions and the minimum wage. Public assets were marked for sale. The health and education systems were starved of funds. A second bailout package was negotiated and then renegotiated. Each payment was conditional on more cuts being implemented.
The result? Greece sank further into recession then depression. Industrial production dropped by one-third, the economy contracted by one-quarter. The unemployment rate was pushed up to more than 25 percent. Private and public consumption was declining. Far from falling, the debt burden increased to 175 percent of GDP.
It was becoming clear that if the economy kept shrinking, the money could not be repaid. “Kicking the can down the road”, was how one economist had described the entire process. Every bailout was, absent a turnaround in the economy’s growth fortunes, just buying time before an inevitable default.
Still it continued, with unrelenting pressure from the European Commission and other EU institutions.
In November 2011, a political crisis erupted. Ongoing working class mobilisations pushed the prime minister to call a referendum on the question of austerity and debt repayment. It was an attempt to blackmail the population into accepting the program, but the prospect of the people having a say over the key question in Greek politics was too much for the European establishment.
Within two weeks of announcing, then withdrawing, the referendum proposal, Papandreou had been forced out. Lucas Papademos, former governor of the Bank of Greece and former vice president of the ECB, was installed as the head of a provisional government. This was the clearest indication yet that the Greek ruling class would stop at nothing to honour the memorandum with the troika and that the troika would stop at nothing to strangle Greece.
A stabilisation of sorts came in 2014. The economy grew for the first time in more than half a decade and the government was able to return to the private markets for financing. Yet the untold and irrevocable damage had been done. When another government collapsed at the end of the year, Antonis Samaras’s New Democracy, the troika still pushed for more cuts. When Syriza was elected on an anti-austerity platform in January this year, the European Commission didn’t blink – it demanded even more pain.
The Financial Times obtained a leaked confidential report prepared for euro area finance ministers in 2012, which outlined how the country’s debt would, all things remaining equal, be about the same proportion of GDP in 2020 as it was in 2008. The report predicted that, under pretty much every scenario, more than a decade of austerity would leave Greece’s finances in a worse state than when austerity was first prescribed. Now troika documents have been obtained by the Guardian. Alberto Nardelli, the publication’s data editor, writes of their estimates:
“Even under the best case scenario, which includes growth of 4 percent a year for the next five years, Greece’s debt levels will drop to only 124 percent, by 2022. The best case also anticipates €15 billion in proceeds from privatisations, five times the estimate in the most likely scenario.
“But under all the scenarios, which all assume a third bailout program … Greece has no chance of meeting the target of reducing its debt to ‘well below 110 percent of GDP by 2022’ set by the Eurogroup of finance ministers in November 2012.”
Why destroy a country?
You could conclude that five years of austerity and pain has been pointless. And you could ask why, given that the creditors knew the damage they were inflicting, the troika continued along such a destructive path. For the ruling classes of Europe there has been certain logic to the process.
First, Greek government bailouts have gone straight into the pockets of the creditors. The UK Jubilee Debt Campaign estimates that more than 90 percent of bailout loans to the Greek government returned to the European financial sector. Less than 10 percent went to the people of Greece. Other analystscalculate that two-thirds to three-quarters was “recycled” in this way. So “kicking the can down the road” in the early years meant a continuation of revenue flows to the big banks. The IMF admitted as much. Jerome Roos, founding editor of ROAR magazine, wrote in June:
“Just consider what the Fund wrote in its ex-post evaluation of the first Greek bailout of 2010. The program, the IMF blatantly states, ‘only served to delay debt restructuring and allowed many private creditors to escape … leaving taxpayers and the official sector on the hook’. Moreover, the Fund admits that ‘earlier debt restructuring could have eased the burden of adjustment on Greece and contributed to a less dramatic contraction in output’.”
Second, with large sections of the North Atlantic financial system still reeling from the GFC, postponing another shock to the system provided time for bank recapitalisations and the construction of mechanisms (such as the European Stability Mechanism and the new Banking Union) that, we are told, will act as firewalls to contagion in the event of another crisis.
Third, even if it meant partial defaults along the way, the Greek economy has to bottom out at some point. When it does, the bosses – both in Greece and in the rest of Europe – calculate that it will be able to become profitable more quickly (therefore more capable of repaying debt) if working class living standards have been pushed into a ditch in the meantime.
Fourth, Greece serves as a message from the kingpins of Europe to the workers of the continent: this will be your future if you don’t accept the dictates of the institutions. By this logic, the economics is subordinate to the political will of the ruling class to maintain neoliberal Europe.
Yet despite the establishment’s seeming confidence regarding a potential Greek default and exit from the euro area– it is a tiny market in the scheme of the total European economy – the ramifications are not so clear. Plenty on the left have argued that the troika is not at all irrational in carrying out this mauling of Greece. Perhaps. But perhaps knowing exactly what they were doing will be cold comfort if unforeseen circumstances result from such an unprecedented event as the collapse and exit of an EU member state. Time might tell.
That raises the question of what the Greek ruling class gets out of this. Despite populist imagery in Greece depicting German chancellor Angela Merkel as a modern day Hitler intent on a second occupation, it is not simply the case that the European establishment is forcing the hand of the Greek establishment. Panos Petrou of the Internationalist Workers Left explained in 2012 that, despite the hand-wringing of right wing Greek politicians at the time,
“Many of the measures that the Greek government is supposedly being forced by its creditors to implement are longstanding demands of the Greek industrialists and bankers, dating back from the 1990s. You don’t have to be an economist to understand that the reduction of private sector wages and attacks on the right to collective bargaining have nothing to do with the state’s finances.”
Sections of Greek capital are surely hurting, but many see this as an opportunity to create a low wage economy. Moreover, the Greek elite want to be part of the imperialist Union. Pulling out of the EU or retreating from it would be a blow for the Greek ruling class, and would leave it politically and economically isolated and less able to assert influence in the region.
Who’s to blame?
The result of this strangulation in social terms is disastrous. The health system has collapsed. Suicides have risen dramatically. Pensioners beg on the streets. There has been an exodus of workers searching for jobs elsewhere. And the country now is being pushed back into recession and teeters on the brink of total economic collapse.
Returning to the question we began with: How did Greece get into this position? The short answer is that it was pushed. The more accurate answer is that it was pushed by the European elite and pulled by a minority in its own ranks – Greek politicians, financiers and capitalists, who are partners in the crime.
It is clear that the crisis is not of the making of the Greek working class, the pensioners, the students or the unemployed. The catastrophe that has befallen them was a calculated strategy of the European elite – the private banks, the European Central Bank, the European Commission, the euro area finance ministers, the Greek ruling class and the EU governments along with the International Monetary Fund.
These groups and institutions ask when Greece will pay its debt. A better question is: when will the European establishment be made to pay for this capital crime?
[First published at Red Flag, newspaper of Socialist Alternative in Australia.]