Greece has defaulted on its 1.3 billion euro payment to the International Monetary Fund and the euro zone is still intact, but nobody has any clear idea about what will happen after next Sunday’s referendum.
Prime Minister Tsipras and Finance Minister Yanis Varoufakis, a game theory expert, have been playing a game of chicken with the troika ever since their Syriza party won the elections last January. All the Greek government wants is to be able to choose the shape of Greek public policy. All the troika – and some of its European partners, namely Germany – demands is for Greece to honor its commitments if it wants more ‘help.’ Unfortunately, the two demands are irreconcilable because they have only one aspect in common: austerity. Greek, indeed European, fiscal policy has been very austere over the past several years. The euro’s rise was pegged to the Deutschmark while the overarching preoccupation of the ECB has been to control inflation, forcing a collapse of the generally Keynesian policies that characterized the economies of many of the euro zone partners. Since the euro came into use in 2002, European governments have faced pressure to cut costs. Since 2010, despite the alleged Greek profligacy, Athens has cut spending more drastically than any other government in Europe. There have been double digit reductions in pension payments, jobs, salaries and investment. Unemployment has reached an optimistic 25%, youth unemployment is beyond 65%.
The troika’s aid has been pegged to Greece showing some signs of growth. Of course the spending cuts, with corresponding tax increases, have only dug austerity deeper. No growth is possible under such circumstances; Europe as a whole must change its tune and resume a more Keynesian outlook if Greece and the euro zone are to survive in the long run. Many will cite Greece’s moral obligations to repay its loans and honor its obligations. If so, then, Wall Street should set the example after banks were bailed out to the tune of $900 billion in 2008 after essentially doing to the mortgage market what private lenders did to Greece. The Greek crisis didn’t suddenly rise from the Aegean like Poseidon’s trident. It turns out, in 2010, Greece borrowed from largely German and French banks – as did many other EU governments. It was unable to repay those loans, so the ECB intervened by lending Greece the money to ensure the private banks got paid what they were owed. In other words, Greece pulled the old college student trick of taking money from one credit card to pay off another. Of course, Greece could not pay back the loans it got from foreign governments and international institutions, creating a situation of political subservience. Its accounts became a concern for other EU members – mostly Germany – resulting in a loss of sovereignty over its financial affairs. In some ways, Great Britain and France did the same with Egypt and the Ottoman Empire in the 19th century, setting the stage for wider occupations.
Greece’s austerity was especially austere. In the UK, the US and other countries affected by the 2008 financial crisis, governments were able to continue relying on financial markets. This was not so in Greece where the lack of funds and lenders prevented the government even from using a budget deficit to soften the recession, let alone stimulate any kind of growth. Germany, which owns most of Greece’s debt, has kept demanding reforms – it has continued to do it this week – but Greece is all out of options. Moreover, the combination of EU governments and international financial institutions in imposing their demand on Greece has been political and economic. In other words, Germany’s interest, or that of the EU for that matter, has not really been to fix Greece as much as to score domestic political points – getting the money back to appear righteous before its own taxpayers. To a lesser extent Portugal, Spain, Italy, and Ireland have felt a similar pressure. That German Chancellor Angela Merkel and her backers in Brussels have systematically favored the interests of the German and French banks above those of citizens in the euro zone might be a crude summary of the situation in Greece, according to British economist Philippe Legrain, who served as advisor to EU Commissioner Jose Manuel Barroso from February 2011 to February 2014. The real culprits of the financial crisis of the euro zone are not debtors (individuals and governments of southern Europe and Ireland), but lenders in Germany and France, and that the recipe proposed by the EU, Frankfurt (where the ECB is based) and Berlin for the solution of the crisis has only created economic depression and mass unemployment because the interests of the German and French banks were put before those of the citizens of the euro zone.
The way Merkel and the EU have responded to Greece and especially to Tsipras’ latest requests is a smug denial that any mistakes were made on the part of Germany’s banks. They have assumed or even pretended that Europe is on the right track and insisting that those who disagree are deluded. The effect is to have fueled extremism and pushed many Greeks – and others in Europe – against Europe. The beginning of the solution for Greece and Europe is to recognize and honestly discuss what went wrong. Yes, the debtors are in part responsible for the mistakes made in the bubble years leading up to 2007. But greater responsibility lies with the bankers, who receive handsome sums for their alleged ability to assess the risks, as well as the presidents of central banks, regulators, supervisors and politicians who could have limited financial excesses, preventing the rise of bubbles that always seem to burst. Of course, when the banks fail, governments bail them out with taxpayers’ money.
The euro zone crisis might be summed up as a story of bad loans from private banks turning into the bad loans between governments. Euro zone policymakers have insisted that local taxpayers in the affected countries pay for the mistakes of foreign banks. Rather than uniting Europe in a collective effort to rein in the banks that created the trouble in the first place, the troika has pitted creditor countries – mainly Germany – against the debtors, forcing EU institutions to do their bidding. This has caused a long and deep recession marked by a collective and excessive austerity resulting in a 25% drop in GDP in Greece. It has depressed demand and had the perverse effect of actually worsening public finances. This has fueled the panic we have seen over the past weeks, as investors wonder what will happen if Greece is forced out of the euro zone and which countries would follow suit. Ironically, Greece has received a mere fraction of the money from the loans for which it bears responsibility. The majority has been used to pay back private-sector creditors while the IMF and the other “official” creditors can do without the money being asked of Greece. Indeed, there are several individual billionaires in the world who could easily foot the sum it owed to the IMF that triggered the escalation of the crisis – money that the IMF would likely lend back to Greece.
Like Ulysses, Tsipras now has to lead the Greeks back to safety but there are two routes. Either they will surrender to the will of the gods in unknown waters or they will opt for a compromise, remaining in the euro zone and enduring more austerity and humiliation. Indeed, Greeks might be better off in the long term by voting No in the referendum, as Tsipras and such economists as Paul Krugman, Joseph Stiglitz and Thomas Piketty have urged. The Greeks would do all Europeans a favor by rejecting the austerity measures. They would force the Union to reconsider the way the euro has been implemented, rejecting the financial and inflation-obsessed approach to one that is more political and human. The argument that Greece’s pullout from the single currency would mark an impending fracture of the euro will prove unfounded. By voting No, the Greeks will be refuting the model whereby the government yields to the demands of the troika such that the ECB intervenes to calm the markets. This is how the euro has been held together so far. A hold, however, that while ensuring a perception of stability has perpetuated a deeply destructive austerity. A few quarters marked by fractions of a percentage point of growth cannot make up for the immense cost of five years of mass unemployment. Voting No would still bring the ECB to stabilize markets but it would also shake up the other countries tiredd of austerity, making changes to the current model inevitable.
The political risks of continued austerity are actually higher. Austerity threatens the center-left parties that have done the most to sustain the euro. By acquiescing to strict austerity they are abandoning the very values for which they stand. Their subservience is perhaps more damaging than the center-right parties, which by enforcing their traditional inflation controlling and debt control policies, would have been simply acting ‘sui generis.’ The left in Europe has been unrecognizable lately and this phenomenon has allowed anti-EU parties to spring up on the left and on the right. Therefore, by holding the referendum, Tsipras has done the right thing. Should Greeks vote No, as he has advised, his government would strengthen and gain more democratic legitimacy. More importantly, the No vote would end the uncertainty. Most Greeks are not at all interested in resuming use of the drachma. They like the euro; but they, and millions of other Europeans, are justifiably fed up with austerity. The referendum will reconcile these two such that Greeks will have officially rejected the stifling economic measures while still expressing their wish to be in the euro zone. Which EU member state will have the guts to kick Greece out of the Union? The referendum will ask voters to set their own priorities, handing over to Tsipras the mandate to do what he must if the troika continue to push. So after being the cradle of democracy, Greece has a chance to set the stage for a rebirth of the European monetary union – a great idea that has lost its bearings, forgetting it is accountable to the people rather than the banks.