Reports from the Economic Front

a blog by Marty Hart-Landsberg

A Test Of Power In Brussels

There is a lot to learn from the standoff in Brussels between Syriza and the Troika (European Commission, European Central Bank, and the IMF) over whether the latter will release the last tranche of bailout funds to the former.  Perhaps the most important lesson is that “politics” triumphs “economics.”  Said differently, Troika leaders are determined to crush any movement, regardless of human cost, that threatens dominant capitalist interests.  In this case, the threat is a popular and successful Syriza and its demonstration effect on class awareness and movements in other European countries, especially Spain, Portugal, and Ireland.

Alex Tsipras, the Greek Prime Minister, understands this.  The following is from a Guardian story:

Greece’s prime minister has said the International Monetary Fund has “criminal responsibility” for the country’s debt crisis as it emerged Athens could miss a €1.6bn (£1.15bn) payment to the lender this month.

Speaking in the Greek parliament Alexis Tsipras called on creditors to reassess the IMF’s insistence on tough cuts as part of the country’s bailout.

“The time has come for the IMF’s proposals to be judged not just by us but especially by Europe,” he said. “Right now, what dominates is the IMF’s harsh views on tough measures, and Europe’s on denying any discussion over debt viability.”

He added: “The fixation on cuts … is most likely part of a political plan … to humiliate an entire people that has suffered in the past five years through no fault of its own.”

The Greek government is running big national budget and trade deficits and is deeply in debt to Troika institutions.  Making these problems worse is the fact that Greece no longer prints its own money, having adopted the euro as its currency in 2001.  Quite simply, as things stand, without a new infusion of funds the government will find it impossible to pay its international debts and support the country’s economic activity. It is this position of weakness that allows the Troika leadership to present Syriza with a “take it or leave it” ultimatum of more austerity, privatizations, and labor market liberalization in exchange for a new loan.

A Little History

Greece didn’t get into this mess overnight or on its own.  The country joined the euro area in 2001, after finally convincing the European Commission that it met the eurozone’s requirements of a budget deficit below 3% of GDP and a national debt below 60% of GDP.  In 2004, Greece finally admitted that it had fudged the figures and had continuously run a greater budget deficit than was allowed.  It was later revealed that Goldman Sachs was a key player in the chicanery.

The European Commission responded to this admission by placing Greece under monitoring and requiring the Greek government to slash public spending.  Greece, it is important to add, was not the only country to have busted these deficit limits—Germany and France, for example, also recorded deficits over the 3% limit–but it was, as far as we know, the only one to manipulate its data.

By 2006 Greece was growing again and in compliance with European Commission deficit rules.  However, the Greek economy remained fragile despite relatively high rates of growth over much of the decade.  Greek growth depended upon debt fueled housing construction and public sector spending.  Its industrial base remained weak as the country experienced an ever growing trade deficit, in large part a consequence of a German export offensive built on a common eurozone currency and wage suppression. In turn, a growing share of the borrowed funds supporting Greek growth came from German and French banks who recycled export earnings back to Greece.

When the global financial crisis exploded in 2008, the Greek economy quickly collapsed.  A sharp recession in 2009 pushed the country’s deficit to over 12.5% of GDP. Greek national debt also soared, leaving the country with the highest debt ratio in the eurozone, over 120% of GDP.

Greece was again put under EU supervision and its government pressed to again slash spending to reduce the public sector deficit and, by extension, its reliance on borrowed funds.  However, the rapidly expanding global economic crisis froze international financial markets, and by early 2010 it was clear that the Greek government would not be able to borrow enough to meet its debt obligations.  In April, after considerable delay due to German resistance, the European Commission finally agreed to establish a bailout fund for Greece with the participation of the IMF.  Eurozone countries agreed to provide 30 billion euros and the IMF an additional 15 billion if Greece accepted monitoring and a tough IMF crafted austerity plan.

This was too little too late.  In May, the European Commission, European Central Bank, and the IMF were forced to put together a much larger bailout package.  Here is the Guardian report of the deal:

European countries stepped into uncharted territory tonight, deciding on the first bailout of a single currency member state by agreeing a three-year package worth 110bn euros (£95bn) to rescue Greece from financial meltdown in return for pledges on the most drastic overhaul of a European economy ever attempted.

Finance ministers from the 16 countries using the single currency met yesterday in Brussels to seal the pact following months of sitting on the fence and two weeks of tough negotiations in Athens involving the International Monetary Fund, the European commission, and the European central bank . . . .

With Greece’s debt relegated to junk status and the country staring at Europe’s first sovereign debt default without the bailout, European leaders sought to put the months of foot-dragging and squabbling behind them to try to shore up the euro and prevent the debt crisis rippling across to Portugal, Spain and Italy.

Of the €110bn over three years, the other 15 euro countries are to supply €80bn in bilateral loans, while the IMF puts up the remaining €30bn. Rehn said that the “systematic, specific, and rigorous” bailout plan came with strings attached tightly, including quarterly monitoring of Greek austerity measures. He revealed the deal required Greece to slash its soaring budget deficit by 6.5% this year alone, a staggering feat if it can be achieved.

The deficit is currently 14% and is to be under 3% by 2014. Several countries need to take the rescue package through parliaments. This is to be done swiftly over the next week, said Jean-Claude Juncker, the Luxembourg leader and chair of the eurogroup, so that the first funds can be released before 19 May when Greece needs to redeem debt of €8.5bn.

It is uncharted territory. The euro rulebook proscribes bailouts of profligate member states and many leaders, foremost Angela Merkel of Germany, are queasy about coming to Athens’ rescue.

In return for the lifeline, Papandreou has committed to the most ambitious and draconian reshaping of Greece’s welfare state ever attempted. Spending cuts amounting to more than €36bn or 11% of national GDP are to be made over the next three years. Wages, pensions, and benefits in Greece’s bloated public sector will be cut, and large VAT and other tax rises will be imposed. The retirement age is to be raised. The savage program will inevitably deepen Greece’s recession.

The Greek government dutifully slashed spending in response to Troika mandates but the result was self-defeating.  Cutting spending in the midst of a recession only deepened the country’s decline, reducing government revenue and therefore doing little to narrow the budget deficit.  Greece’s economy contracted by -0.4% in 2008, -4.4% in 2009, -5.4% in 2010, -8.9% in 2011, and -6.6% in 2012.  Its budget deficit as a percent of GDP was -10.4% in 2010, -9.9% in 2011, and -9.4 in 2012.

In March 2012, the Troika was forced to extend its first bailout.  As the New York Times explains:

After months of tortuous and tense negotiations, a second bailout for Greece finally became a reality  . . . when euro zone nations formally approved the plan and authorized the release of the first multibillion-euro loan installment.

In a statement, Jean-Claude Juncker, who, as the president of the Eurogroup, leads the finance ministers of the 17 European Union members that use the euro, said the national governments had formally approved Greece’s second rescue, which is valued at 130 billion euros ($170 billion). “All required national and parliamentary procedures have been finalized,” he said. . . .

A first installment of 39.4 billion euros ($51.4 billion) in loans will be disbursed from the euro zone’s temporary bailout fund, the European Financial Stability Facility.

The board of the International Monetary Fund is scheduled to meet on Thursday and is expected to agree to contribute 28 billion euros ($37 billion) to the package.

Greece will not be handed a blank check. The bailout loans will be paid in installments, and each tranche of aid will be conditional on the government in Athens hitting goals and completing structural changes to its economy, including the privatization of state-owned assets.

If the reform program is successful, Greece’s debt level by 2020 could be slightly lower than once expected, according to the latest projections, though it would still equal 116.5 percent of gross domestic product.

In all, Greece is expected to receive almost 173 billion euros ($226 billion) from international lenders, taking into account the new bailout and loans from its first rescue package, granted in 2010.

This program was supposed to run through the end of 2014 but was extended again after the election of Syriza in January 2015.  It is the last payment from the 2012 bailout that is at the center of current talks between the Troika and Syriza.  The Troika is withholding this payment until Syriza agrees to abide by the same policies approved by the previous Greek government, which means that Syriza must agree to more budget cuts, privatizations, and labor market liberalization.  Without the money, Syriza will be unable to make its June payment to the IMF and July payment to the European Commission, an outcome that would likely force the country out of the eurozone and into uncharted waters.

Syriza, for its part, having been elected to office on its anti-austerity platform, has refused these terms, proposing instead a different plan of action, one which includes permission to increase both its public spending and taxes on the wealthy, strengthen labor rights, and support re-industrialization.  It also seeks an actual debt reduction to lighten the load that the sizeable debt payments place on the country’s recovery.  It argues that agreeing to continue with the same Troika policies that have been in place since 2010 will only produce the same result: economic decline and unsustainable budget and debt loads, necessitating yet more borrowing.

Trokia Politics

Germany and the IMF have taken leadership in demanding that Syriza toe the line. Angela Merkel and Christine Lagarde argue that their demand for austerity is based on sound economics, but history has shown the folly of their position.  In fact, even IMF staff acknowledge that Troika demands are counterproductive. As the economic journalist Ambrose Evans-Pritchard explains:

The IMF knows that Greece cannot possibly pay [down its debts] by draconian austerity – the policy already implemented for five years with such self-defeating effects – and the longer it pretends otherwise, the more its authority drains away. . . .

The IMF enforced brute liquidation without compensating stimulus or relief. It claimed that its policies would lead to a 2.6pc contraction of GDP in 2010 followed by brisk recovery.

What in fact happened was six years of depression, a deflationary spiral, a 26pc fall in GDP, 60pc youth unemployment, mass exodus of the young and the brightest, chronic hysteresis that will blight Greece’s prospects for a decade to come, and to cap it all the debt ratio exploded because of the mathematical – and predictable – denominator effect of shrinking nominal GDP.

It is a public policy scandal of the first order. One part of the IMF has issued a mea culpa admitting that its own analysts misjudged the fiscal multiplier badly. Plaudits to them.

Another part of the Fund continues to push new variants of the same indefensible policies, demanding a combined fiscal squeeze from pension cuts and VAT rises equal to 1pc of GDP this year and 2pc next year even as the economy lurches back into recession.

Ashoka Mody, former chief of the IMF’s bail-out in Ireland, refuses to criticize his former colleagues on the European desk, but the meaning of [his] words are clear enough.

“Everything that we have learned over the last five years is that it is stunningly bad economics to enforce austerity on a country when it is in a deflationary cycle. Trauma patients have to heal their wounds before they can train for the 10K.”

“I am frankly shocked that we are even having a discussion about raising VAT at all in these circumstances. We have just seen a premature rise in VAT knock the wind out of a country as strong as Japan.”

“Syriza should recruit the IMF’s research department to be their spokesman because they are saying almost exactly the same thing as Syriza on the economics of this. The entire strategy of the creditors is wrong and the longer this goes on, the more is its going to cost them.”

The IMF’s Original Sin in Greece was to allow the urbane Parisian Dominique Strauss-Kahn to hijack the institution to prop up Europe’s monetary union and the European banking system when the crisis erupted in 2010.

The Fund’s mission is to save countries, not currencies or banks, and it certainly should not be doing dirty work for a rich currency union that is fully capable of sorting out its own affairs, but refuses to do so for political reasons.

It was of course a difficult moment in May 2010. The eurozone was spinning out of control. There were no backstop defences – due to the criminal negligence of Europe’s leaders and banking regulators – and fears of a euro-Lehman were all too real.

Yet leaked minutes from the IMF board meetings showed that all the emerging market members (and Switzerland) opposed the terms of the first loan package for Greece. They protested that it was intended to save the euro, not Greece.

It loaded yet more debt onto the crushed shoulders of an already bankrupt country, and further complicated the picture by allowing one large French bank and one German bank – no names please – to offload much of their €25bn combined exposure onto EMU taxpayers.

“Debt restructuring should have been on the table,” said Brazil’s member. The loans “may be seen not as a rescue of Greece, which will have to undergo a wrenching adjustment, but as a bailout of Greece’s private debt holders, mainly European financial institutions”.

Arvind Virmani, India’s member, was prophetic. “The scale of the fiscal reduction without any monetary policy offset is unprecedented. It is a mammoth burden that the economy could hardly bear,” he said.

“Even if, arguably, the program is successfully implemented, it could trigger a deflationary spiral of falling prices, falling employment and falling fiscal revenues that could eventually undermine the program itself.” This is exactly what has happened.

Pensions

The Troika have taken direct aim at Greek pensions, well-aware that Syriza has said that it will not accept any agreement that requires them to further reduce payouts, especially to those at the bottom of the income distribution.   The situation is well described by the economist Michael Roberts:

The callous disregard of the poverty of Greeks, particularly the old, is shown in the statement of IMF chief economist Olivier Blanchard in a blog post.  Blanchard blithely pontificates “we believe that even the lower new [deficit] target cannot be credibly achieved without a comprehensive reform of the value-added tax (VAT) – involving a widening of its base – and a further adjustment of pensions.  Why insist on pensions? Pensions and wages account for about 75% of primary spending; the other 25% have already been cut to the bone.  Pension expenditures account for over 16% of GDP, and transfers from the budget to the pension system are close to 10% of GDP.  We believe a reduction of pension expenditures of 1% of GDP (out of 16%) is needed, and that it can be done while protecting the poorest pensioners”.

But Blanchard’s demand will not protect the ‘poorest’ pensioners as it involves a cut in EKAS, the pension fund for those on lower incomes. A recent poll revealed that 52% of Greek households claimed their main source of income is pensions. This is not because so many people are ‘gaming’ the system and drawing on pensions; it is more because so many Greeks are unemployed without qualifying for benefits or employed but not being paid. If pensions are cut further, a lot of Greek households will really suffer at a time when the economy will likely continue to shrink.  10,000 Greeks have taken their own lives over the past five years of crisis, according to Theodoros Giannaros, a public hospital governor, whose own son committed suicide after losing his job.

The myth that Greeks are all living off the state and sunning themselves on the beaches with their early retirement pensions – something peddled by the Troika and politicians in northern Europe to their electorates – is just that, a Greek myth.  Yes, pensions amount to 16% of GDP, making Greece appear to have the most expensive pension system in Europe.  But this is partly because Greek GDP has dropped so much in the last five years.  Moreover, Greece’s high spending is largely the result of bad demographics: 20% of Greeks are over age 65, one of the highest percentages in the Eurozone.  If you adjust for this by looking at pension spending per person over 65, then Greek pension outlays are below the Euro average.

But the facts don’t matter.  The Troika continues to reject a series of compromises offered by Syriza, pushing the Greek government to the wall on pensions, taxes, privatization, labor policy and more.

A Test Of Power

Alexis Tsipras, the Greek Prime Minister, voiced his frustration with the talks and determination to keep his party’s election promises in a recent Le Monde article.  The main points of the piece are summarized by the economic journalist Paul Mason:

The key passage is Mr Tsipras’ claim that the tax and spending changes Syriza wants “will increase revenues, and will do so without having recessionary effects since they do not further reduce active demand or place more burdens on the low and middle social strata”. –

Basically the Greek government believes there can be non-austerity fiscal discipline and the lenders do not. And that is why Greece remains, for all the emollience in Tsipras article, on a collision course with its lenders.

And here is where Tsipras’ article gets interesting. He accuses that faction among the lenders that is blocking progress – implicitly the German finance ministry and its hardline allies on the ECB – of wanting to create a “two-speed Europe”:  “where the ‘core’ will set tough rules regarding austerity and adaptation and will appoint a ‘super’ Finance Minister of the EZ with unlimited power, and with the ability to even reject budgets of sovereign states that are not aligned with the doctrines of extreme neoliberalism. For those countries that refuse to bow to the new authority, the solution will be simple: Harsh punishment. Mandatory austerity. And even worse, more restrictions on the movement of capital, disciplinary sanctions, fines and even a parallel currency”.

In other words, what is taking place in Brussels is not about economics, it is about politics, or better said domination.  The Troika want a different regime in power in Greece, one subservient to their interests. Its leaders hope that the economic pressure they are applying during a period of renewed recession will cause the Greek people to abandon Syriza, or as a second best, that Syriza will break and discredit itself by agreeing to Troika demands.

How this ends isn’t clear.  If Syriza holds firm the Troika have to weigh the gains and losses from having its bluff called. A bankrupt Greece cut free from the euro could cause international investors to become fearful about the stability of Spain or Italy, leading to capital flight from those countries and the eventual unraveling of the entire eurozone project.  The survival of Syriza and the revitalization of the Greek economy will depend heavily on how well its supporters understand what is at stake.

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