Greece and its ‘Eurogeddon’

T. SABRI ÖNCÜ

July 13, 2015

APPeople protest during a pro Greece demonstration at the European Union office in Barcelona, Spain, Friday, July 3, 2015. A new opinion poll shows a dead heat in Greece's referendum campaign with just two days to go before Sunday's vote on whether Greeks should accept more austerity in return for bailout loans. The banner reads in Spanish: "No to the Troika, I support Greece"

Despite the European Commission’s pronouncement of a Grexit scenario having been in place, this seems unlikely. In all likelihood it will be the euro that will suffer more and possibly fall apart if Greece exits in one way or another

When Greece’s governing and also radical leftist party, Syriza, won the Greek elections on January 25, 2015, it formed a coalition with the 13-seat nationalist Anel Party the next day after falling two seats short of the 151 seats needed to form the government on its own. But ever since the formation of the government, the world has been watching the developments as it has been in negotiations with the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF) —better known as the Troika.

The Troika has been in charge of “managing” the ongoing Eurozone Debt Crisis that started in Greece in May 2010 and represents the international creditors of Greece.

Despite this, Syriza was in retreat in almost every step of the negotiations. It eventually became an “unreliable negotiating partner” in the eyes of its negotiating counterparts who finally made a ‘take it or leave it’ offer on June 25, 2015. And the unexpected happened the next day: the Syriza leader and Greek Prime Minister, Alexis Tsipras, called for a referendum to be held on July 5, 2015 to accept or reject this offer.

Back to 2001

About 64 per cent of eligible Greek voters participated in the referendum. In the end, of the votes that were valid, 61 per cent were ‘no’ and 39 per cent were yes.

The problem with the referendum was that not only had the Troika’s offer already expired, but also consisted of two lengthy documents that were incomprehensible to most voters. Indeed, on this expiry date, Greece became the first developed country to default on the IMF as it failed to transfer €1.55 billion by the end of the business day — the single largest missed repayment in the IMF’s history.

So, what did the voters reject? To answer this, let us go back to 2001.

For a country of the European Union to enter the eurozone, that country must meet the criterion of the 1992 Maastricht Treaty on debt levels and deficit spending. Despite meeting this with difficulty, through Wall Street, particularly, with Goldman Sachs-assisted “creative” accounting and financial engineering, Greece entered the eurozone in January 2001. From 2001 to 2007, the Greek Gross Domestic Product (GDP) grew at an impressive average rate of 4.3 per cent, compared with the eurozone average of 3.1 per cent. Incidentally, this period intersected with the 2002-2007 monetary expansion in the advanced capitalist countries of the centre. In search of high yields, private capital started to flow from the centre to the periphery, creating excessively easy credit conditions. Indeed, the primary drivers of these impressive growth rates were this easy, credit-fuelled, private consumption and government spending. Unfortunately, a significant portion of the credit-fuelled government spending was for non-productive purposes such as the 2004 Athens Olympics and military needs, notably on German ships and tanks, which was about 3 per cent of the GDP in the period — the highest in Europe.

Then came the Great Recession in the United States, which lasted from January 2007 to June 2009. Further, in June 2007, the ongoing Global Financial Crisis hit the U.S. When Lehman collapsed in September 2008, both the financial crisis and Great Recession became global. Under these conditions, the private capital flow surge that started in 2002 from the centre to the periphery suddenly reversed in 2008. Both these events adversely affected not only the Greek economy, but also its ability to roll over its debts. Unlike non-eurozone peripheral countries with their own domestic currencies, Greece was unable to devalue its currency and raise the interest rates to weather the storm. Soon, Greece found itself in trouble.

The bailout

Although Greece had managed to get away with dressing its balance sheet for years, the cosmetic treatment of the balance sheet became evident in early 2009. When the Papandreou government that was elected in October 2009 stopped the exercise and released the true numbers, it became evident that Greece was not suffering from illiquidity. It was insolvent.

Then, all hell broke loose and Greece ended up in the mess that started in May 2010.

Since the onset of the crisis, Greece has gone through two “bailout” programmes that were structured by the Troika: one in May 2010 and the other in March 2012. However, despite these “bailouts”, Greece has been in depression since the beginning of 2009. From its peak in 2008, the Greek GDP is now down by about 27 per cent, unemployment is above 25 per cent, youth unemployment is above 60 per cent, and the Greek debt to GDP ratio is about 180 per cent.

Reforms

In return for these programmes, the Troika demanded a variety of “free-market reforms”, although they were named differently. What was demanded in the name of “fiscal reforms” was more and more austerity, that is, less and less spending by the government and households. Furthermore, the “structural reforms” asked for, among other things, cuts in retirement and other social benefits, further reducing the purchasing power of households. In addition, under the rubric of privatisation to increase “efficiency”, these “reforms” required Greece to put up its public assets for sale to the benefit of rentiers rather than to the benefit of its rightful owners, thereby reducing the income that could have been earned from their fair sale.

The inevitable result of these “reforms” has been deepening depression, because an economy cannot grow if all of its sectors spend less and less, and instead earns a measly sum from the fire sale of its assets.

Some ardent believers of the neoclassical economic orthodoxy argue that despite that the government and households spending less, the economy can pick up the slack, because production may become more profitable under austerity and labour market flexibility — that is, there will be an obedient work force. However, leaving aside the fact that this is just a myth under current world-historical conditions and the euro in the case of Greece — because Greece cannot devalue its currency to increase its exports — this was not what happened. The result is that many Greeks are now lining up at soup kitchens, in scenes that are reminiscent of the soup kitchens of the Great Depression of 1929.

It was these “free-market reforms” and the resulting misery that the Greek voters said ‘no’ to.

Yet, the “civilized” Troika technocrats — many of them with doctorates from “respected” Western universities — either pretend that they believe these “free-market reforms” can generate growth or are ardent believers of some religion which says they can. It could also be that they have a different agenda.

Although Syriza is supposedly a coalition of the radical left, what it has been asking from the creditors has been hardly radical. Leaving the euro in an “unfriendly” fashion and defaulting on its debt have never been on its cards. From the beginning it had stated that it had no intention to leave either the euro, that is, the eurozone, or the EU. It has claimed that it was for a Europe of the people, rather than of the finance capital.

All it wanted was some breathing space to put the country’s economy back on track to meet the basic needs of the people for a modest but decent life that they have been lacking since the beginning of the ongoing depression and to be able to pay a portion of their debt, all of which is not payable under any condition.

A ‘coup’

One of the tools Syriza’s negotiating partners has used against Syriza has been the liquidity lines provided by the ECB to Greek banks. Since, under the euro, Greece lacks a central bank that can provide liquidity to its banks independently of the ECB, Greece’s banks are in the hands of the Troika. If the ECB pulls the plug and freezes the liquidity lines to the Greek banks, not only will the Greek banking system crash, but also cause the Syriza government to collapse.

Indeed, any government in any country collapses when the country’s banking system collapses. This is what I call an attempted coup in Greece and it appears that the coup attempt is still going on.

A very “civilized” ultimatum to Greece came from a special eurozone summit in Brussels on July 7. Its message: “Strike a new deal with the eurozone creditors or face a banking collapse, a humanitarian emergency and the start of an exit from the euro.” The EC President, Jean-Claude Juncker, even said, “We have a Grexit scenario prepared in detail”, meaning “we know how we will kick Greece out of the euro.” I doubt that, and in all likelihood it will be the euro that will suffer more and possibly fall apart if Greece exits in one way or another, but this is what he said.

The deadline given to Greece to strike the new deal was July 9. Prior to that, however, two moves came from the U.S., the major shareholder of the IMF. On June 26, the IMF stated the obvious: that the Greek debt is not payable and has to be restructured. Then, on July 8, the U.S. Treasury Secretary, Jack Lew, and the IMF managing director, Christine Lagarde — a Franco-American front — tried to increase pressure on Germany, the hegemon of the EU, to grant debt relief to Greece and help it avoid an exit from the eurozone. Even the French President, François Hollande, is supporting Greece; the Italian Prime Minister, Matteo Renzi, is backing the Franco-American front.

On July 9, the Syriza made a final counter-offer. Many viewed this as absolute capitulation because it differed from the June 25 Troika offer that the Greek voters rejected only in two minor details, and which are not even worth mentioning. Finally, on July 10, the counter-offer was voted in the Greek Parliament and, to the dismay of many observers siding with Greece, approved by a 251-member majority out of 300, adding more to the confusion. What was the point of the referendum then?

However, what was attached to the counter-offer that many overlooked was debt relief, which has been off the table since the beginning. After the landslide ‘no’ to the June 25 offer by the Troika in the July 5 referendum and with the backing of the U.S., France and Italy, Syriza is now stronger than ever.

Now, the ball is in the court of 18 of the 19 German-led eurozone member-states excluding Greece. As on July 12, a day after the completion of this article, they were still discussing whether to keep Greece in the eurozone. And if they do decide to keep Greece in, how much debt relief will they grant to it?

They may still kick Greece out the eurozone, but the world is watching.

(T. Sabri Öncü is a co-founder of SoS Economics in Istanbul. He has worked inter alia as Senior Economist for UNCTAD and as Head of Research at the Reserve Bank of India’s Centre for Advanced Financial Research and Learning.)