Reports from the Economic Front

a blog by Marty Hart-Landsberg

Category Archives: Budget Deficit

The Bipartisan Militarization Of The US Federal Budget

The media likes to frame the limits of political struggle as between the Democratic and Republican parties, as if each side upholds a radically different political vision. However, in a number of key areas, leaders of both parties are happy to unite around an anti-worker agenda.  Support for the military and an aggressive foreign policy is one such area.

On September 18, US senators approved the National Defense Authorization Act (NDAA) of 2018.  Donald Trump had proposed increasing the military budget by $54 billion.  The Senate voted 89-9 to increase it by $37 billion more than Trump sought.  In the words of the New York Times:  “In a rare act of bipartisanship on Capitol Hill, the Senate passed a $700 billion defense policy bill on Monday that sets forth a muscular vision of America as a global power, with a Pentagon budget that far exceeds what President Trump has asked for.”

The NDAA calls for giving $640 billion to the Pentagon for its basic operations and another $60 billion for war operations in other countries, including Iraq, Syria, and Afghanistan.  The House passed its own version of the bill, which included a smaller increase over Trump’s request as well as new initiatives such as the creation of a Space Corps not supported by the Senate.  Thus, the House and Senate need to reconcile their differences before the bill goes to President Trump for his signature.

It is clear that Democratic Party opposition to Trump does not include opposition to US militarism and imperialism. As Ajamu Baraka points out:

Opposition to Trump has been framed in ways that supports the agenda of the Democratic Party—but not the anti-war agenda. Therefore, anti-Trumpism does not include a position against war and U.S. imperialism.

When the Trump administration proposed what many saw as an obscene request for an additional $54 billion in military spending, we witnessed a momentary negative response from some liberal Democrats. The thinking was that this could be highlighted as yet another one of the supposedly demonic moves by the administration and it was added to the talking points for the Democrats. That was until 117 Democrats voted with Republicans in the House—including a majority of the Congressional Black Caucus—to not only accept the administration’s proposal, but to exceed it by $18 billion. By that point, the Democrats went silent on the issue.

It is important to keep in mind that, as William D. Hartung shows, “there are hundreds of billions of dollars in ‘defense’ spending that aren’t even counted in the Pentagon budget.” Hartung goes agency by agency to show the “hidden” spending.  As he notes:

You might think that the most powerful weapons in the U.S. arsenal — nuclear warheads — would be paid for out of the Pentagon budget.   And you would, of course, be wrong.  The cost of researching, developing, maintaining, and “modernizing” the American arsenal of 6,800 nuclear warheads falls to an obscure agency located inside the Department of Energy, the National Nuclear Security Administration, or NNSA. It also works on naval nuclear reactors, pays for the environmental cleanup of nuclear weapons facilities, and funds the nation’s three nuclear weapons laboratories, at a total annual cost of more than $20 billion per year.

Hartung’s grand total, which includes, among other things, the costs of Homeland Security, foreign military aid, intelligence services, the Veterans Administration, and the interest on the debt generated by past spending on the military, is $1.09 Trillion.  In short, our political leaders are far from forthcoming about the true size of our military spending.

Militarization comes home

Opponents of this huge military budget are right to stress how it greatly increases the dangers of war and the harm our military interventions do to people in other countries, but the costs of militarism are also felt by those living in the United States.

For example, ever escalating military budgets fund ever new and more deadly weapons of destruction, and much of the outdated equipment is sold to police departments, contributing to the militarization of our police and the growing use of force on domestic opponents of administration policies, the poor, and communities of color.  As Lisa Wade explains:

In 1996, the federal government passed a law giving the military permission to donate excess equipment to local police departments. Starting in 1998, millions of dollars worth of equipment was transferred each year, as shown in the figure below. Then, after 9/11, there was a huge increase in transfers. In 2014, they amounted to the equivalent of 796.8  million dollars.

Those concerned about police violence worried that police officers in possession of military equipment would be more likely to use violence against civilians, and new research suggests that they’re right.

Political scientist Casey Delehanty and his colleagues compared the number of civilians killed by police with the monetary value of transferred military equipment across 455 counties in four states. Controlling for other factors (e.g., race, poverty, drug use), they found that killings rose along with increasing transfers. In the case of the county that received the largest transfer of military equipment, killings more than doubled.

Militarization squeezes nondefense social spending 

Growing military spending also squeezes spending on vital domestic social services, including housing, health, education, and employment protections, as critical programs and agencies are starved for funds in the name of fiscal responsibility.

The federal budget is made up of nondiscretionary and discretionary spending.  Nondiscretionary spending is mandated by existing legislation, for example, interest payments on the national debt.  Discretionary spending is not, and thus its allocation among programs clearly reveals Congressional priorities.  The biggest divide in the discretionary budget is between defense and nondefense discretionary spending.

The nondefense discretionary budget is, as explained by the Center on Budget and Policy Priorities:

the main budget area that invests in the nation’s future productivity, supporting education, basic research, job training, and infrastructure.  It also supports priorities such as providing housing and child care assistance to low- and moderate-income families, protecting against infectious diseases, enforcing laws that protect workers and consumers, and caring for national parks and other public lands.  A significant share of this funding comes in the form of grants to state and local governments.

As we see below, nondefense discretionary appropriations have fallen dramatically in real terms and could potentially fall to a low of $516 billion if Congress does not waive the sequestration caps established in 2011.

The decline is even more dramatic when measured relative to GDP.  Under the caps and sequestration currently in place, nondefense spending in 2017 equaled 3.2 percent of GDP, just 0.1 percentage point above the lowest percentage on record going back to 1962.  According to the Center on Budget and Policy Priorities, “That percentage will continue to fall if the caps and sequestration remain unchanged, equaling the previous record low of 3.1 percent in 2018 and then continuing to fall (see the figure below).”

Looking ahead

As the next figure shows, the proposed Trump budget would intensify the attack on federal domestic social programs and agencies.

If approved, it “would take nondefense discretionary spending next year to its lowest level in at least six decades as a percentage of the economy and, by 2027, to its lowest on that basis since the Hoover Administration — possibly even earlier.”  Of course, some categories of the proposed nondefense discretionary budget are slated for growth–veterans’ affairs and homeland security–which means that the squeeze on other programs would be worse than the aggregate numbers suggest.

No doubt the Democratic Party will mount a fierce struggle to resist the worst of Trump’s proposed cuts, and they are likely to succeed.  But the important point is that the trend of militarizing our federal budget and society more generally will likely continue, a trend encouraged by past Democratic as well as Republican administrations.

If we are to advance our movement for social change, we need to do a better job of building a strong grassroots movement in opposition to militarism.  Among other things, that requires us to do a better job communicating all the ways in which militarism sets us back, in particular the ways in which militarism promotes racism and social division, globalization and economic decay, and the deterioration of our environment and quality of life, as well as death abroad and at home, all in the interest of corporate profits.  In other words, we have to find more effective ways of drawing together our various struggles for peace, jobs, and justice.

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Secular Stagnation

Government policy makers, no matter the party in power, like to project a rosy future. However, claims of economic renewal, absent fundamental changes in the structure and workings of the US economy, should not be taken seriously.  The fundamental changes I would advocate are those that would: dramatically boost worker power; secure a progressive and growing funding base for a needed expansion of public housing and infrastructure and public spending on health care, education, and transportation; and end the production and use of fossil fuels and significantly reduce greenhouse emissions.

Fundamental changes are needed because the United States is suffering from an extended period of slow and declining growth, what is known as secular stagnation.

The following figure, taken from a Financial Times blog post, shows the duration and average rate of growth of every economic expansion in the postwar period.  The current expansion, which started in the second quarter of 2009, is the third longest, although soon to become the second.  Among other things, that means that a new recession is likely not far off (especially with the Federal Reserve Board apparently committed to boosting interest rates).

As we can see, the current expansion has recorded the slowest rate of growth of any expansion.  Moreover, as Cardiff Garcia, the author of the blog post, points out: “Also worrying is the observation from the chart that every subsequent expansion since 1970 has grown at a slower pace than its predecessor, regardless of what caused the downturn from which it was recovering.”

Michalis Nikiforos and Gennaro Zezza begin their Levy Economics Institute report on current economic trends as follows:

From a macroeconomic point of view, 2016 was an ordinary year in the post–Great Recession period. As in prior years, the conventional forecasts predicted that this would be the year the economy would finally escape from the “new normal” of secular stagnation. But just as in every previous year, the forecasts were confounded by the actual result: lower-than-expected growth—just 1.6 percent.

The following figures illustrate the overall weakness of the current expansion.  Each figure shows, for every postwar expansion, a major macro indicator and its growth over time since the end of its preceding recession.  The three most recent expansions, including the current one, are color highlighted.

Figure 1A makes clear that growth has been slower in this expansion than in any previous expansion. Figure 1B shows that “real consumption has grown only about 18 percent compared to the trough of 2009—similar to the expansion of GDP—and also stands out as the slowest recovery of consumption growth in the postwar period.”

Perhaps most striking is the actual decrease in real government expenditure shown in figure 1D.  Real government expenditure is some 6 percent lower than it was eight years ago.  In no other expansion did real government expenditure fall.  Without doubt austerity is one of the main reasons for our current slow expansion.

Significantly, as we see in figure 7 below, the stock market has continued to boom in spite of the weak performance of the economy.  This figure shows that the total value of the stock market has risen sharply, regardless of whether compared to the growth in personal income or profits (measured by net operating surplus).   This rise has generally kept those at the top of the income pyramid happy despite the country’s weak overall economic performance.

No doubt, on-going wage stagnation, which has depressed consumption, and privatization, which has grown in concert with austerity, has helped to fuel this new stock market bubble.  One reason top income earners have been so favorable to the broad contours of Trump administration policy is that it is designed to strengthen both trends.

Recession will come.  In an era of secular stagnation that means the downturn will hit an already weak economy and struggling working class.  And the upturn that follows will likely be weaker than the current one.  Market forces will not save us.  Real improvements demand transformative policy changes.

The Problem Of Hunger In The US

Food insecurity is a major problem in the US.   The food stamp program–renamed the Supplemental Nutrition Assistance Program (SNAP) in 2008–helps, but that program is now threatened by the Trump administration.  An organization of the food insecure, echoing the Councils of the Unemployed of the 1930s, may well be needed if we are to make meaningful progress in reducing hunger.

The extent of food insecurity  

The federal government measures food insecurity using a yearly set of questions that are part of the U.S. Census Bureau’s Current Population Survey (CPS).  The questions asked, as a Hamilton Project study on food insecurity and SNAP explains, are about:

households’ resources available for food and whether adults or children in the household adjusted their food intake—cutting meal size, skipping meals, or going for a day without food—because of lack of money for food. A household is considered to be “food insecure” if, due to a lack of resources, it had difficulty at some time during the year providing enough food for all of its members. The more-severe categorization of “very low food security” status describes those food-insecure households in which members’ food intake was reduced and their normal eating patterns disrupted at some point during the year because of a lack of resources for food. Food insecurity and very low food security are measured at the household level, though questions about adults and children are asked separately.

Officially, 12.7 percent of US households were food insecure in 2015.  Five percent were very low food secure.

The extent of food insecurity is significantly greater in households with children under 18.  As we see below, 16.6 percent of all households with children suffered from food insecurity in 2015.  In more than half of those households, the adults were able to shelter their children.  However, both children and adults were food insecure in 7.8 percent of all households with children.

Food insecurity trends

Food insecurity is a problem in the United States even during periods of economic expansion.  As the following chart shows, more than one in ten households suffered from food insecurity during the growth years of 2001 to 2007.  The percentage of households experiencing food insecurity spiked with the start of the Great Recession and was slow to decline.  Although it is now falling, it is unclear whether it will return to pre-recession levels.

And, not surprisingly, non-white households are far more likely to experience food insecurity than white households.

It is also important to recognize that annual rates of food insecurity tend to minimize the true extent of the problem.  That is because households tend to move into and then out of food insecurity over time.  In other words, it is often a temporary problem.  Thus, many more families will experience food insecurity over a period of time than suggested by the annual numbers.  Of course, even one year of food insecurity can have serious health consequences.

As the Hamilton Institute study notes:

Annual rates of food insecurity mask the extent of the food insecurity problem. Using the Current Population Survey, we can follow large numbers of households across two consecutive years, allowing us to compare food security status over time. In consecutive years during the post-recession period 2008–14, over 24 percent of households with children experienced food insecurity in one or both years: 9 percent of household experienced food insecurity in consecutive years, and an additional 15 percent of households experienced food insecurity in only one of the two years.

SNAP 

SNAP is one of the most important federal responses to food insecurity. To qualify for food stamps, a household needs to earn at or below 130% of the poverty line—or about $26,000 or less a year for a family of three. As of May 2017, 42.3 million people were receiving food stamps. Without the SNAP program, many more people would be experiencing food insecurity.

The following figures show the rise in the number and percentage of people receiving food stamps, and the average monthly food stamp benefit.  The growth in the number of food stamp recipients over the 2001 to 2007 period of economic growth reflects the explosion in inequality and weak job growth.  And the need for food assistance exploded with the Great Recession and has remained high because of the weak economic recovery that has followed.

The challenge ahead

Determined to slash all non-military discretionary programs, President Trump’s proposed budget calls for cutting almost $200 billion over the next decade from the Department of Agriculture’s SNAP program.  That is a cut of approximately 25 percent.

With weak job growth and stagnant wages likely in the years ahead, any cut to the SNAP budget will mean a new spike in hunger, especially for children.  One has to wonder when people will reach their limit and begin to organize and fight back.

Those struggling with food insecurity might well take inspiration from the work of the unemployed councils of the 1930s.  These councils provided a basis for the unemployed to resist rent increases and evictions, as well as fight for public assistance, unemployment insurance, and a public works program.  The councils also strongly supported union organizing efforts, ensuring that the unemployed respected union picket lines.  In return, many unions supported the work of the councils.

The unemployed in the 1930s eventually recognized that their situation was largely the result of the dysfunctional workings of the economic system of the time and they organized to defend their rights and change that system.  Households experiencing hunger today need to develop that same understanding about the root cause of their situation and respond accordingly.

Trump’s “Skinny Budget” Has A Lot Of Military

President Trump released what is called a “skinny budget.”   It may contain far less information then the skinny budgets released by the five previous administrations, but its aim is crystal clear: more money for militarism, less money for pretty much everything else.

As the Center on Budget and Policy Priorities explains:

The Trump budget includes only estimates for fiscal 2018 and only for its proposed changes to discretionary programs (those funded through the annual appropriations process) — even though discretionary programs make up less than one-third of the federal budget.  The Trump budget omits any figures on entitlement or mandatory spending (e.g., Social Security, Medicare, Medicaid, federal retirement, or SNAP), interest payments, revenues, or deficits.

The following table shows the Trump administration’s proposed changes in discretionary program spending for fiscal year 2018 (which begins in October 2017).

The budget calls for a continuation of Obama administration cuts in overall discretionary spending—a 1.2 percent decline in real dollars for fiscal year 2018.  The figure below highlights the trend. 

In many cases, the proposed cuts to nonmilitary programs appear designed to dismantle key government agencies and programs.  A few examples:

The Environmental Protection Agency would take the biggest hit, with a proposed 31 percent cut to its budget. This would give the agency its smallest budget since it was formed in 1970.  Angela Chen and Alessandra Potenza, writing in the Verge, highlight what is at stake:

Through legislation like the Clean Air Act and the Clean Water Act, the EPA has ensured that Americans live in a relatively healthy environment. Thanks to the EPA’s work, from 1970 to 2015, national emissions of pollutants like lead, carbon monoxide, and nitrogen dioxide have declined by an average of 70 percent. These and more changes meant 160,000 people in the US didn’t die prematurely due to air pollution in 2010 alone. Since the 1980s, the EPA has also worked with local authorities to clean up some of the most polluted sites in the US, from landfills that caught fire to radioactive waste housed close to residential areas.

The proposed Department of Health and Human Services budget would, in real terms, be rolled back 18 years, to its 2000 spending level. The Department, as Chen and Potenza describe:

oversees several major agencies, including the Food and Drug Administration, the National Institutes of Health, the Centers for Disease Control and Prevention, the Substance Abuse and Mental Health Services Administration, and the Office for Civil Rights. . . .These agencies make sure our drugs are safeprovide funding for medical research, lead the way during public health outbreaks such as the ebola scare, and provide services to those struggling with drug addiction. . . .Half of the most transformative drugs of the last 25 years were made possible because of publicly funded research, according to a 2015 study.

The proposed budget for the Education Department would be its lowest in 17 years.

The discretionary part of the Department of Agriculture budget would be slashed to its lowest level since the 1970s.

Transportation would have its lowest real budget in 18 years.

Labor’s budget would be rolled back to levels last seen in the 1970s.

And then there is Defense and Homeland Security, both of which enjoy substantial real increases.  This despite the fact that the Defense Department cannot even account for how it spends its money.  As Reuters reports:

The United States Army’s finances are so jumbled it had to make trillions of dollars of improper accounting adjustments to create an illusion that its books are balanced.

The Defense Department’s Inspector General, in a June [2016] report, said the Army made $2.8 trillion in wrongful adjustments to accounting entries in one quarter alone in 2015, and $6.5 trillion for the year. Yet the Army lacked receipts and invoices to support those numbers or simply made them up.

As a result, the Army’s financial statements for 2015 were “materially misstated,” the report concluded. The “forced” adjustments rendered the statements useless because “DoD and Army managers could not rely on the data in their accounting systems when making management and resource decisions.”

Disclosure of the Army’s manipulation of numbers is the latest example of the severe accounting problems plaguing the Defense Department for decades.

The report affirms a 2013 Reuters series revealing how the Defense Department falsified accounting on a large scale as it scrambled to close its books. As a result, there has been no way to know how the Defense Department – far and away the biggest chunk of Congress’ annual budget – spends the public’s money.

The new report focused on the Army’s General Fund, the bigger of its two main accounts, with assets of $282.6 billion in 2015. The Army lost or didn’t keep required data, and much of the data it had was inaccurate, the IG said.

None of this matters, of course, to those powerful political and economic forces that are determined to push the militarization of the country.

Whether this skinny budget turns out to be a trial balloon, a way for the Trump administration to gauge how far it can go, followed by modest adjustments if it meets strong resistance, remains to be seen.  Regardless, it is critical that we begin now to engage in serious coalition building involving those communities that rely on public services and the public sector workers, at all levels of government, that deliver those services, to shape and advance a powerful and positive vision of the public sector we want and need.  Otherwise, we face a future of ever worsening tradeoffs, with profit-driven corporations steadily moving into the vacuum created by cuts in public programs to increase their control over all facets of our lives.

The Fading Magic Of The Market

Poorer than their Parents?  That was the question McKinsey & Company posed and attempted to answer in their July 2016 report titled: Poorer Than Their parents? Flat or Falling Incomes in Advanced Economies.

Here is the report’s key takeaway, which is illustrated in the figure below:

Our research shows that in 2014, between 65 and 70 percent of households in 25 advanced economies were in income segments whose real market incomes—from wages and capital—were flat or below where they had been in 2005.  This does not mean that individual households’ wages necessarily went down but that households earned the same as or less than similar households had earned in 2005 on average.  In the preceding years, between 1993 and 2005, this flat or falling phenomenon was rare, with less than 2 percent of households not advancing.  In absolute numbers, while fewer than ten million people were affected in the 1993-2005 period, that figure exploded to between 540 million and 580 million people in 2005-14.chart-1

More specifically, McKinsey & Company researchers divided households in six advanced capitalist countries (France, Italy, the Netherlands, Sweden, the United Kingdom, and the United States) into various income segments based on their rank in their respective national income distributions.  They then examined changes in the various income segments over the two periods noted above.  Finally, they “scaled up the findings to include 19 other advanced economies with similar growth rates and income distribution patterns, for a total of 25 countries with a combined population of about 800 million that account for just over 50 percent of global GDP.”

The following figure illustrates market income dynamics over the 2005-14 period in the six above mentioned advanced capitalist countries. For example, 81 percent of the US population were in groups with flat or falling market income.

six-target-countries

The next figure provides a more detailed look at these market income dynamics.

market-income-six-target-countries

McKinsey & Company researchers also looked at disposable income trends, which required them to incorporate taxes and transfer payments.  As seen in the first figure of this post, government intervention meant that the percentage of households experiencing flat or declining disposable income was considerably less than the percentage experiencing flat or declining market incomes, 20-25 percent versus 65-70 percent.

The researchers attempted to explain these trends by analyzing “the patterns of median market and median disposable incomes for two periods: 1993 to 2005 and 2005 to 2014.  We focus on income changes of the median income household because middle-income households are representative of the overall flat or falling income trend in most countries, with the singular exception of Sweden.”

They highlighted five factors: aggregate demand factors, demographic factors, labor market factors, capital income factors, and tax and transfer factors.  As we can see from the second figure above, labor market changes hammered median market income in the United States, the United Kingdom, and the Netherlands.  And as we can also see, tax reductions and transfer payments helped to offset declines in median market disposable income in those three countries. In the case of the United States, while median market income fell by 3 percent over the period, median disposable income grew by 2 percent.

What is the answer to the question posed by McKinsey & Company?  Most likely large numbers of people will indeed be poorer than their parents.  Why?  Aggregate demand continues to stagnate as does investment and productivity.  Employment growth remains weak while precariousness of employment continues to grow.  Finally, the elite embrace of austerity works against the likelihood of new progressive government social interventions.  Without significant change in the political economies of the major capitalist countries, the next 14 years are going to be painful for billions of people.

Brexit and Grexit

With all the talk of Brexit it is easy to forget about Greece and the terrible cost that county continues to pay for its Eurozone membership.  [For more on the Greek crisis and political responses to it see my article The Pitfalls and Possibilities of Socialist Transformation: The Case of Greece.]  Unfortunately, the UK vote to leave the European Union has done nothing to encourage EU leaders to modify their view that the economically weaker European country governments must continue to impose austerity on their respective populations.

Matthew C Klein, in a Financial Times blog post, illustrates what EU-imposed austerity has meant for Greece.  As he comments, “The collapse of the Greek economy is almost without precedent.”

As we see in the figure below, real household consumption has fallen 27 percent since its peak.  Consumption only fell by 6 percent during the period of the global financial crisis.

Greece-real-HH-consumption-590x290

As a result of mass unemployment, wage cuts, and tax increases, Greek disposable household income has fallen even more.  The collapse in consumption was “moderated” only by massive dissaving.  From 2006 to 2009 the personal savings rate averaged 6 percent.  In 2015, Klein reports, it was -6 percent.

Since mid-2011, Greek households have suffered a €19 billion decline in savings.  This includes, as shown in the next figure, a decline of €36 billion in household deposits and cash, including deposits in non-Greek banks and foreign currency.  One has to wonder how many Greeks have already run out of savings.

Greece-HH-deposits-by-type-590x303


Greek spending on housing and consumer durables, what Klein calls household investment, has fallen from about one-fifth of disposable income in 2007 to just 2 percent in 2015.  This spending is too low to offset depreciation. “After accounting for wear and tear, Greek household spending on housing, cars, etc is now running at a rate of -5 per cent of household incomes.”

Greece-HH-net-investment-rate-590x303
Greek business has also been disinvesting.  And until recently so was the government.  “The combined effect [of household, business and government disinvestment] is Greece’s capital stock has been shrinking by about 6 to 7 per cent of output since 2012.”

Greece-disinvestment1-590x301

According to Sharmini Peries, the executive producer of The Real News Network:

With the Brexit vote clinched by those who voted to leave the E.U., the possibility of a Grexit has reemerged in the minds of some. Greece has far more reason to leave the E.U. than the U.K. In a recent survey done by Pew Research, E.U.’s favorability has dropped by double digits in the continent. In Greece more than any other E.U. country, 71 percent of those who took part in the survey said that they had unfavorable views of the E.U.–far higher than the U.K. Further, more than 90 percent disapprove the way in which the E.U. has handled economic issues and the migrant crisis, where the Greeks bear the brunt of that burden.

So, how has the EU responded to the UK vote and Greece’s continuing economic unraveling?

In the words of Dimitri Lascaris, who Peries interviewed for perspective on the impact of Brexit on Grexit:

Well, I think the Greeks would be wildly supportive of anything that results in a relaxation of the austerity policies. As we’ve seen, however, the electorate of the Greek will has virtually no impact on policymaking in the E.U. That was demonstrated in rather brutal fashion in July of last year after over 60 percent of Greeks rejected a less severe austerity program than was ultimately imposed on them.

So it’s interesting, it’s very instructive to look at how the E.U. elite has reacted to the Brexit vote, in particular in the context of Portugal, because Portugal late last year elected a government, a socialist minority government, that appears to have some level of support from leftist parties and the Greens, enough to maintain power for the time being. And initially that party said that they were going to roll back the severe austerity that had been imposed on Portugal. And Portugal is widely viewed as being the country that is most at risk after Greece in the eurozone because of the debt and austerity and the rest of it.

So what happened with the last 48 hours, well after the E.U. elite in the IMF had time to digest the results in Britain? The IMF issued a statement urging the Portuguese government to redouble its commitment to austerity. And Wolfgang Wolfgang Schäuble, the finance minister of Germany, caused quite an uproar when he told the press in the last couple of days that if Portugal didn’t stick by the austerity dictates of the current bailout, it would be forced to come hat-in-hand to the E.U. to beg for yet another bailout. And that caused quite a bit of outrage in Portugal.

So at this stage there’s absolutely no indication, as far as I can see, that the E.U. elite has learned any lessons from the Greek referendum in July of last year or the Brexit vote, both of which were certainly, at least to some degree–this isn’t the whole story, I think, but to some degree they were an expression of discontent with the economic policies of the E.U. and with the fundamentally antidemocratic character of the E.U. So at this stage there’s little reason to believe that the E.U. elite is going to draw the lessons that ought to be drawn from these two votes.

Of course, it is also possible that the EU elite have correctly understood the political moment.  After all, imposed austerity policies have enabled them to shift much of the costs of the recent crisis and ongoing economic stagnation onto working people in Europe’s so-called periphery and blunt potential political challenges to existing European relations of power.  Human suffering doesn’t appear to figure prominently in their calculations.

The World Economy: Trouble Ahead

Economic conditions are not good and the signs are for more trouble.  The post-Great Recession recovery has been incredibly weak and it appears that it will soon come to an end.  And here I am writing about all the advanced capitalist economies, not just the United States.  Perhaps the key indicator: investment and productivity trends.

Here is the International Monetary Fund [IMF] writing in 2015: “Private fixed investment in advanced economies contracted sharply during the global financial crisis, and there has been little recovery since.”

More specifically, the IMF finds that:

The sharp contraction in private investment during the crisis, and the subsequent weak recovery, have primarily been a phenomenon of the advanced economies. For these economies, private investment has declined by an average of 25 percent since the crisis compared with precrisis forecasts, and there has been little recovery. In contrast, private investment in emerging market and developing economies has gradually slowed in recent years, following a boom in the early to mid-2000s.

The investment slump in the advanced economies has been broad based. Though the contraction has been sharpest in the private residential (housing) sector, nonresidential (business) investment—which is a much larger share of total investment—accounts for the bulk (more than two-thirds) of the slump. There is little sign of recovery toward precrisis investment trends in either sector.

real private investment

The figure above illustrates how far advanced economy investment has fallen relative to the precrisis period and past forecasts and that there has been no recovery in investment spending (the log scale shows percentage change in investment).

The following figure, which covers only advanced economies, demonstrates that the investment slump has affected both residential and nonresidential investment.  And, as far as the latter is concerned, investment spending on both structures and real equipment are significantly down relative to past trends.

types of investment

These trends have real consequences.  As the economist Michael Roberts points out,  “Global industrial output growth continues to slow and in the case of the G7 economies (red line below), industrial production is now contracting.”

world IP

He also highlights the fact that “world trade . . . is in significant negative territory (red line below).  This is partly due to the collapse in energy and other industrial raw material prices.  But even when you strip out the impact of the deflation in prices, world trade volume is basically static (blue line) and well below even the low world GDP growth rate of around 2.5%.  Countries with low domestic demand can expect no compensation through exports.”

world trade

The investment slump has also taken its toll on productivity.  According to the Financial Times:

Output per person . . . grew just 1.2 per cent across the world in 2015, down from 1.9 per cent in 2014. A slowdown in Chinese productivity was a big driver, as was poorer output growth in commodity producing countries in Latin America and Africa because of weaker oil prices and production.

Productivity growth in the eurozone, measured by gross domestic product per hour, is set to be a feeble 0.3 per cent and barely better in Japan at 0.4 per cent.

But the US, which appeared to be outperforming other advanced economies, is now increasingly concerned at the deterioration in its own performance. Growth in output per hour slowed last year to just 0.3 per cent from 0.5 per cent in 2014, well below the pace of 2.4 per cent in 1999 to 2006.

Moreover, things are fast deterioriating in the US.  The Financial Times reports that productivity will likely fall this year for the first time in three decades. “Research by the Conference Board, a US think-tank, also shows the rate of productivity growth sliding behind the feeble rates in other advanced economies, with gross domestic product per hour projected to drop by 0.2 per cent this year.”

us-productivity-growth

Sadly, as Roberts argues, most governments still seek to rejuvenate their respective economies by some combination of monetary easing, cuts in public investment, privatization, weakening labor rights, and new free trade agreements. These policies have not worked and there is no reason to think that they ever will.

The Greek Tragedy Continues

The Greek tragedy continues.  Greece remains in depression.  The economic downturn began in 2008 and the economy has shrunk every year since, with the exception of 2014.  Although millions are suffering from poverty, the Greek government has continued to make its debt payments, first to foreign banks and now to the Troika.  This pairing is the result of two huge loans by Troika institutions in exchange for the imposition of fierce austerity policies.

The Greek people have refused to quietly accept the unraveling of their society.  According to the Greek police, there were 27,103 protests and rallies in Athens alone between 2011 and 2015.  The number of rallies attended by more than 1,000 people were 61 in 2012, 72 in 2013, 58 in 2014 and 72 in 2015.  Knowing the reliability of police record keeping, these are likely undercounts.

article-1273498-09728EC4000005DC-137_468x286

Despite popular resistance, a commitment to more austerity in exchange for yet more debt was recently approved by the Greek parliament.  It includes new cuts to pensions, increases in required social security contributions, and higher personal and business taxes.  Tragically, the current agreement was negotiated by Syriza, the political party elected in January 2015 on the basis of its commitment to end the austerity and renegotiate the country’s foreign debt.

I recently published an article in the journal Class, Race, and Corporate Power which attempts to explain the forces driving Greece’s economic crisis and the failure of Syriza to fulfill its promises.   The abstract is below.  The article can be accessed for free here, on the journal’s webpage.

 

The Pitfalls and Possibilities of Socialist Transformation: The Case of Greece

Abstract:

With its 2015 electoral victory in Greece, Syriza became the first left political party to lead a European government since the founding of the European Union. As such, its eventual capitulation to the demands of the Troika was a bitter development, and not only for the people of Greece. Because the need for change remains as great as ever, and efforts at electoral-based transformations continue, especially in Europe, this paper seeks to assess the Greek experience, and in particular Syriza’s political options and choices, in order to help activists more effectively respond to the challenges faced when confronting capitalist power.

Section 1 examines how Greece’s membership in the euro area promoted an increasingly fragile and unsustainable economic expansion over the period 2001 to 2007. Section 2 discusses the role of the Troika in Greece’s 2008 to 2014 downward spiral into depression. Section 3 discusses the ways in which popular Greek resistance to their country’s crisis helped to shape and nourish Syriza as a new type of left political organization, “a mass connective party.” Section 4 critically analyzes the Syriza-led government’s political choices, highlighting alternative policies not chosen that might have helped the government break the Troika’s strangle hold over the Greek economy and further radicalize the Greek population. Section 5 concludes with a presentation of five lessons from the Greek experience of relevance for future struggles.

Lessons From A Defeat In Europe

The Troika are celebrating the end of negotiations with Greece, proclaiming that thanks to their tireless efforts the Eurozone remains whole.  And why wouldn’t they celebrate.  They have demonstrated their power to crush, at least for now, the Greek effort to end austerity and its associated devastating social consequences.  Tragically, Syriza has not only surrendered, the nature of its defeat is likely to leave the country worse off, at least both economically and very likely politically as well.

At this point, one of the most important things we can do is try to draw lessons from the Greek experience.

  • Perhaps one of the most obvious lessons is that visions of a more humane Europe are not real.  European leaders were more than willing to pursue the complete collapse of the Greek economy in order to break Syriza and the movement that gave it power for fear of the demonstration effect a successful Syriza might have had on broader European politics.  Using the lever of a European Central Bank cut off of funding for Greek banks, the Troika pressed Syriza to the wall.

  Here is how a Guardian blog post described the nature of the discussions leading up to the final Greek surrender:

Alexis Tsipras was given a very rough ride in his meeting with Tusk, Merkel and Hollande, our Europe editor Ian Traynor reports.

Tsipras was told that Greece will either become an effective “ward” of the eurozone, by agreeing to immediately implement swift reforms this week.

Or, it leaves the euro area and watches its banks collapse.

One official dubbed it “extensive mental waterboarding”, in an attempt to make the Greek PM fall into line.

An unpleasant image that highlights just how far we have now fallen from those European standards of solidarity and unity.

  • Second, the vicious nature of the European response to the Greek government’s initial offer of moderate austerity, symbolized by the stance of its dominant power Germany, reflects more than ignorance or petty mindedness on the part of European leaders.  It reflects the increasingly exploitive nature of contemporary capitalism everywhere.  Capitalists, pursuing profits in an increasingly competitive and unstable global system, demand ever greater power to intensify the exploitation of workers everywhere and that is how dominant states approach social policy in their respective countries and international institutions.
  • Third, class interests dominate so-called “economic rationality”.  A case in point: in the period before the July 5 referendum we learned that IMF staff believed that Greece would be unable to pay its debts under the best of conditions and that therefore any agreement with Greece had to include debt relief while at the very same time the head of the IMF was aggressively joining with European leaders to reject Greek government pleas for just such relief.
  • Fourth, since dominant powers will do everything in their power to block meaningful social transformation, those seeking to lead it must prepare people as best they can for the expected class struggle and opposition.  In this case Syriza can and should be faulted for not engaging people about the difficulty of achieving both an end to austerity and Eurozone membership under current conditions and doing its best to develop the technical and political capacities necessary for a break from the Euro on its own terms if and when the situation called for it.

 

Greeks elected a progressive government, voting Syriza into power in January 2015, on the basis of the party’s commitment to both anti-austerity and continuing Eurozone membership.  The leadership of Syriza never wavered from encouraging Greeks to believe that both were possible and most Greeks, for many reasons, were eager to believe that this was true.  Although the results of the July 5 referendum showed that the Greek working class has a strong fighting spirit, polling also revealed that most of those who voted No hoped that their vote against the European austerity plan would lead to a better deal from Europe, not a break from the Eurozone.  They no doubt felt this way because of government pronouncements.

For example, below are the results of polling done the day before the referendum:

consequencesNO

 

eurovsEU

Tragically, immediately after the vote the Greek government surprised everyone by returning to negotiations with the Troika with an offer to accept an austerity program much like the one that had been originally placed before the people and rejected.  The only meaningful addition was that it included the long held Greek proposal for debt relief.  This decision was a serious mistake for two reasons—it generated serious confusion on the part of the Greek population and perhaps even more importantly convinced the Troika that the Greek government was not prepared to use its new domestic support to challenge the status quo.  This only emboldened the Troika to proclaim that the referendum had changed everything and now that trust had been lost between the Troika and Syriza leaders, the austerity demands had to be intensified.

In fact, we have learned that Syriza’s leaders did not expect to win the referendum and were prepared to and in fact perhaps hoped to be able to resign and let more conservative forces negotiate and approve a new austerity package.  Here is part of an interview with James K. Galbraith, a strong Syriza supporter:

The recent Ambrose Evans Pritchard piece is very much on the mark (” Europe is blowing itself apart over Greece – and nobody seems able to stop it“). The Greek government, and particularly the circle around Alexis, were worn down by this process. They saw that the other side does, in fact, have the power to destroy the Greek economy and the Greek society — which it is doing — in a very brutal, very sadistic way, because the burden falls particularly heavily on pensions. They were in some respects expecting that the yes would prevail, and even to some degree thinking that that was the best way to get out of this. The voters would speak and they would acquiesce. They would leave office and there would be a general election.

It all went downhill from there.  In short, Syriza leadership had no plan B.  The Troika knew that Syriza was unwilling to pursue its own break from the Eurozone, which meant that its leadership would do anything to remain in the Eurozone.  The following is from an interview with Yanis Varoufakis, the former Greek finance minister, that provides insight into the somewhat self-inflicted weakness in Syriza’s bargaining stance:

The referendum of 5 July has also been rapidly forgotten. It was preemptively dismissed by the Eurozone, and many people saw it as a farce – a sideshow that offered a false choice and created false hope, and was only going to ruin Tsipras when he later signed the deal he was campaigning against. As Schäuble supposedly said, elections cannot be allowed to change anything. But Varoufakis believes that it could have changed everything. On the night of the referendum he had a plan, Tsipras just never quite agreed to it.

The Eurozone can dictate terms to Greece because it is no longer fearful of a Grexit. It is convinced that its banks are now protected if Greek banks default. But Varoufakis thought that he still had some leverage: once the ECB forced Greece’s banks to close, he could act unilaterally.

He said he spent the past month warning the Greek cabinet that the ECB would close Greece’s banks to force a deal. When they did, he was prepared to do three things: issue euro-denominated IOUs; apply a “haircut” to the bonds Greek issued to the ECB in 2012, reducing Greece’s debt; and seize control of the Bank of Greece from the ECB.

None of the moves would constitute a Grexit but they would have threatened it. Varoufakis was confident that Greece could not be expelled by the Eurogroup; there is no legal provision for such a move. But only by making Grexit possible could Greece win a better deal. And Varoufakis thought the referendum offered Syriza the mandate they needed to strike with such bold moves – or at least to announce them.

He hinted at this plan on the eve of the referendum, and reports later suggested this was what cost him his job. He offered a clearer explanation.

As the crowds were celebrating on Sunday night in Syntagma Square, Syriza’s six-strong inner cabinet held a critical vote. By four votes to two, Varoufakis failed to win support for his plan, and couldn’t convince Tsipras. He had wanted to enact his “triptych” of measures earlier in the week, when the ECB first forced Greek banks to shut. Sunday night was his final attempt. When he lost his departure was inevitable.

“That very night the government decided that the will of the people, this resounding ‘No’, should not be what energised the energetic approach [his plan]. Instead it should lead to major concessions to the other side: the meeting of the council of political leaders, with our Prime Minister accepting the premise that whatever happens, whatever the other side does, we will never respond in any way that challenges them. And essentially that means folding. … You cease to negotiate.”

Of course, it is easy to call for a break with the Eurozone but in reality such a break would not be a walk in the park.  For example, Varoufakis makes clear that there were no certainties for what would happen if the government decided on a break:

“He [Tsipras] wasn’t clear back then what his views were, on the drachma versus the euro, on the causes of the crises, and I had very, well shall I say, ‘set views’ on what was going on. A dialogue begun … I believe that I helped shape his views of what should be done.”

And yet Tsipras diverged from him at the last. He understands why. Varoufakis could not guarantee that a Grexit would work. After Syriza took power in January, a small team had, “in theory, on paper,” been thinking through how it might. But he said that, “I’m not sure we would manage it, because managing the collapse of a monetary union takes a great deal of expertise, and I’m not sure we have it here in Greece without the help of outsiders.” More years of austerity lie ahead, but he knows Tsipras has an obligation to “not let this country become a failed state”.

To be a bit more specific, a break from the Eurozone would require nationalization of the banks—an act that would immediately draw the country into a serious legal test with Europe since the banks are technically under the control of the European Central Bank.  It would require the government to quickly issue new script as it prepared a new currency, and aggressively engage in an expanded public works program.  At the same time it was unclear whether the new script would be accepted and whether the country would have sufficient foreign exchange to maintain minimum purchases of key import items such as food and medicine.  Moreover, many businesses, holding debts denominated in euros, would likely be forced into bankruptcy necessitating government takeover.  And, all this would take place in a relatively hostile international environment.  No doubt some countries would offer words of solidarity, but it appears unlikely that any would or could offer meaningful financial or technical assistance.   Still, with proper preparation the possibilities for success could have been greatly enhanced.

Strikingly, Varoufakis mentioned that Syriza had established a small team to think about what a break would mean shortly after their January 2015 election, a team that no doubt was kept small because the government wanted to keep the planning secret.  But that was a mistake.  Planning should have happened on a large scale and in a visible way.  Discussions should have been held with international legal experts as well as with the Brics countries concerning possible use of their new lending and investment facilities.  There was no need to keep this planning quiet, quite the opposite—Eurozone leaders should have been made aware that Syriza was seriously studying its alternatives.  And the population should have been brought along—that the government would do all in its power to stay in the eurozone as long as this was consistent with an end to austerity.

As it was, Tsprias went back into negotiations unarmed, desperate for a bailout.  Once the ECB tightened its support for Greece’s banking system it should have been clear, if not before then, that a German-led Europe was only interested in total surrender on the part of Greece.  And as far as I can tell total surrender is what they got.

Greece has agreed to austerity program that is far worse than any previously rejected.  Here is the Guardian summary of what was agreed:

Greek assets transfer

Up to €50bn (£35bn) worth of Greek assets will be transferred to a new fund, which will contribute to the recapitalisation of the country’s banks. The fund will be based in Athens, not Luxembourg as Germany had originally demanded.

The location of the fund was a key sticking point in the marathon overnight talks. Transferring the assets out of Greece would have meant “liquidity asphyxiation”, Tsipras said.

As the statement puts it: “Valuable Greek assets will be transferred to an independent fund that will monetise the assets through privatisations and other means.”

The “valuable assets” are likely to include things such as planes, airports, infrastructure and banks, analysts say.

Some of the fund will be used to recapitalise banks and decrease debt, but analysts are sceptical about how much money there will really be to work with.

“Given the experience of the last few years’ privatisation programme, these targets appear overtly optimistic, serving as a signalling mechanism of Greek government commitment to privatisation rather than a meaningful source of financing for bank recapitalisation, growth and debt reduction,” said George Saravelos, a strategist at Deutsche Bank.

Pensions

Greece has been told that it needs to pass measures to “improve long-term sustainability of the pension system” by 15 July.

The country’s pensions system, and its perceived generosity relative to other eurozone states, has been a key sticking point in the past five months of negotiations with creditors.

The so-called troika of lenders believes that Athens can save 0.25% to 0.5% of GDP in 2015 and 1% of GDP in 2016 by reforming pensions.

Greece had wanted to draw out reform of early retirement rules, starting in October and running until 2025, when everyone would retire at 67. The EU wants the process to start immediately, by imposing huge costs on those who want to retire early to discourage them from doing so. The lenders also say Athens must bring forward the reform programme so it completes in 2022.

VAT and other taxes

Another source of contention in the months of failed negotiations that preceded Monday’s tentative deal, VAT is now also on the block for immediate reform.

The latest agreement demands measures, again by 15 July, for “the streamlining of the VAT system and the broadening of the tax base to increase revenue”.

One of the key objections from Greece’s creditors to its VAT system is a 30% discount for the Greek islands. Athens proposed a compromise on 10 July under which the exemptions for the big tourist islands – where the revenue opportunities are greatest – would end first, with the more remote islands following later.

The onus on Greece to “increase revenue” is likely to mean more items will be covered by the top VAT rate of 23%, including restaurant bills, something that had until recently been a red line for Tsipras.

Statistics office

Another demand for legislation by 15 July is on “the safeguarding of the full legal independence of ELSTAT”, the Greek statistics office.

Balancing the books

Greece has been told it must legislate by 15 July to introduce “quasi-automatic spending cuts” if it deviates from primary surplus targets. In other words, if it cannot cut enough to balance the books, it should cut some more.

In the past, the troika has demanded that Greece commit to a budget surplus of 1% in 2015, rising to 3.5% by 2018.

Bridging finance

Talks will begin immediately on bridging finance to avert the collapse of Greece’s banking system and help cover its debt repayments this summer. Greece must repay more than €7bn to the European Central Bank (ECB) in July and August, before any bailout cash can be handed over.

Debt restructuring

Greece has been promised discussions on restructuring its debts. A statement from Sunday night also ruled out any “haircuts”, leaving the €240bn Greece owes to Brussels, the ECB and the International Monetary Fund (IMF) on the books.

Angela Merkel, the German chancellor, said the Eurogroup was ready to consider extending the maturity on Greek loans. She argues that a delay in loan repayments and a lower interest rate act in the same way as a write-off, which is why many analysts point out that the Greek debt mountain is worth the equivalent of 90% of GDP in real terms and not the 180% commonly quoted. Merkel said that for this reason there was no need for a Plan B.

Radical reforms

Tsipras pledged to implement radical reforms to ensure the Greek oligarchy finally makes a fair contribution. The agreement thrashed out overnight would allow Greece to stand on its feet again, he said.

Implementation of the reforms would be tough, he said, but “we fought hard abroad, we must now fight at home against vested interests”.

He added: “The measures are recessionary, but we hope that putting Grexit to bed means inward investment can begin to flow, negating them.”

Liberalising the economy

The new deal also calls for “more ambitious product market reforms” that will include liberalising the economy with measures ranging from bringing in Sunday trading hours to opening up closed professions.

Greece’s labour markets must also be liberalised, the other eurozone leaders say. Notably, they are demanding Athens “undertake rigourous reviews and modernisation” of collective bargaining and industrial action.

Pharmacy ownership, the designation of bakeries and the marketing of milk are also up for reform, all as recommended in a “toolkit” from the Paris-based Organisation for Economic Co-operation and Development.

IMF support

The statement from the euro summit stipulates that Greece will request continued IMF support from March 2016. This is another loss for Tsipras, who had reportedly resisted further IMF involvement in Greece’s rescue.

Energy market

Greece has been told to get on with privatising its energy transmission network operator (ADMIE).

Financial sector

Greece has been told to strengthen its financial sector, including taking “decisive action on non-performing loans” and eliminating political interference.

Shrinking the state

Athens has been told to depoliticise the Greek administration and to continue cutting the costs of public administration.

The Guardian highlights one of the hidden landmines in the agreement:

Our economics editor Larry Elliott has been going through the details of this morning’s deal and concludes it will deepen the country’s recession, make its debt position less sustainable and that it “virtually guarantees that its problems come bubbling back to the surface before too long.”

He continues:

One line in the seven-page euro summit statement sums up the thinking behind this act of folly, the one that talks about “quasi-automatic spending cuts in case of deviations from ambitious primary surplus targets”.

Translated into everyday English, what this means is that leaving to one side the interest payments on its debt, Greece will have to raise more in revenues than the government spends each and every year. If the performance of the economy is not strong enough to meet these targets, the “quasi-automatic” spending cuts will kick in. If Greece is in a hole, the rest of the euro zone will hand it a spade and tell it to keep digging.

This approach to the public finances went out of fashion during the 1930s but is now back. Most modern governments operate what are known as “automatic stabilisers”, under which they run bigger deficits (or smaller surpluses) in bad times because it is accepted that raising taxes or cutting spending during a recession reduces demand and so makes the recession worse.

At least according to press reports, Tsprias put up his greatest fight over inclusion of the IMF in monitoring the agreement and privatization.  The IMF is definitely in.  As for privatization or what the Guardian calls “Asset Transfer,” gains were minimal.  One can question in fact whether at least the latter area is one where Tsprias should have tried to draw lines.  At least on the face of it, it would seem that it would have made more sense to fight the demand to “liberalize” labor markets.  A victory here would have given the state freedom to encourage the development of a strong labor movement, regardless of ownership.

Moreover, as noted in the summary, Greece is still not guaranteed new loans or debt relief.  Its parliament has to pass all of the above and then the government gets to start negotiations again.

As the Guardian reports:

European leaders lined up to say Grexit has been averted, but this snappy soundbite glides over the fact the eurozone has simply agreed to open negotiations on an €86bn (£62bn) bailout. Although this is a step to shoring-up confidence in the euro, it is only a promise to have more talks with no guarantee of success.

Talks on the bailout plan are forecast to last around four weeks. “We know time is critical for Greece, but there are no shortcuts,” said Klaus Regling, the official in charge of the the European Stability Mechanism, the eurozone’s permanent bailout fund that Greece hopes to tap.

But these formal talks can only begin, if eurozone leaders avoid several political and financial tripwires. The Greek government has until the end of Wednesday to ensure that sweeping reforms to its pension system and VAT rates are written into law. If Greek lawmakers meet this eurozone-imposed deadline, the baton will pass to the creditors. At least five countries, including Germany, the Netherlands and Finland, will have to put the idea of opening negotiations on a bailout to a parliamentary vote.

Politics could be overtaken by financial deadlines. Athens faces demands to repay €7bn of debts in July, including €3.5bn due to the European Central Bank on Monday (20 July).

Eurozone officials are working round the clock to come up with emergency funds that will help Greece bridge the gap before a permanent bailout kicks in. “It’s not going to be easy,” said Jeroen Dijsselbloem, the hawkish Dutch politician, who was re-elected chair of the eurozone group of finance ministers on Monday. Several options were being discussed on bridge finance, but no one had found “the golden key to solve the problem”, he said, although he hopes to see progress by Wednesday.

The ECB will also continue to maintain a choke hold on the Greek economy perhaps for months, tightening if any deviations take place.

They told clients tonight that the European Central Bank is unlikely to cut Greece much slack until the third bailout is agreed.

We suspect the ECB will stall an ELA decision until Greece begins to legislate the new deal later this week.

Greece would still face a tight ELA cap, however. We expect the ELA cap will remain carefully calibrated and controlled at least until the new ESM loan is fully in place. Access to banks could be fully normalised only in the fall.

It is hard to see this agreement as anything but failure.  Clearly the main responsibility for this disaster rests with the leaders of Germany and the European Union.  They showed that they had no interest in meaningful, honest negotiations, fearing that they would likely lead to a real challenge to their power.  But unfortunately Syriza’s leadership did not make the best of the bad hand they were dealt.  They needed to talk more truthfully to the population about the political/class nature of and reasons for the difficult challenges they faced and do the maximum possible to strengthen their negotiating position and prepare the population for the failure that they thought likely.

Hopefully, the Greek people will find the time and space necessary to digest and learn the lessons from this struggle and successfully regroup. We all must.

Victory: Greece Over The Troika

It seems certain that the political economy textbooks of the future will include a chapter on the experience of Greece in 2015.

July 5, 2015, the people of Greece overwhelmingly voted NO to the Troika’s austerity ultimatum.  According to the Greek government, “61.31% of the votes for the 5th of July Referendum voted “NO” whereas 38.69% voted “YES”.  There was also a 5.8% of invalid/blank votes.  Turnout was 62.5%.”

The Greek government, led by its prime minister, Alexis Tsipras, refused to accept Troika dictates.  Instead, recognizing how important the decision was, he put the Troika’s “take it or leave it” ultimatum up to referendum.  Win or lose, that was an inspiring vote of confidence in the Greek people.  And by the extent of their participation and choice in the vote the Greek people showed that his confidence was not misplaced.

Background To The Referendum

Greece has experienced six consecutive years of recession and the social costs have been enormous.  The following charts provide only the barest glimpse into the human suffering:

Infographics / Unemployment

Infographics / Unemployment

Infographics / Social Impact

Infographics / Social Impact

Infographics / Poverty

Infographics / Poverty

While the Troika has always been eager to blame this outcome on the bungling and dishonesty of successive Greek governments and even the Greek people, the fact is that it is Troika policies that are primarily responsible.  In broad brush, Greece grew rapidly over the 2000s in large part thanks to government borrowing, especially from French and German banks.  When the global financial crisis hit in late 2008, Greece was quickly thrown into recession and the Greek government found its revenue in steep decline and its ability to borrow sharply limited.  By 2010, without its own national currency, it faced bankruptcy.

Enter the Troika.  In 2010, the European Commission, European Central Bank, and the IMF penned the first bailout agreement with the Greek government.  The Greek government received new loans in exchange for its acceptance of austerity policies and monitoring by the IMF.  Most of the new money went back out of the country, largely to its bank creditors.  And the massive cuts in public spending deepened the country’s recession.   By 2011 it had become clear that the Troika’s policies were self-defeating.  The deeper recession further reduced tax revenues, making it harder for the Greek government to pay its debts.  Thus in 2012 the Troika again extended loans to the Greek government as part of a second bailout which included . . . wait for it . . . yet new austerity measures.

Not surprisingly, the outcome was more of the same.  By then, French and German banks were off the hook.  It was now the European governments and the International Monetary Fund that worried about repayment.  And the Greek economy continued its downward ascent.

Significantly, in 2012, IMF staff eventually acknowledged that the institution’s support for austerity in 2010 was a mistake.  Simply put, if you ask a government to cut spending during a period of recession you will only worsen the recession.  And a country in recession will not be able to pay its debts.  It was a pretty clear and obvious conclusion.

But, significantly this acknowledgement did little to change Troika policy to Greece.

By the end of 2014, the Greek people were fed up.  Their government had done most of what was demanded of it and yet the economy continued to worsen and the country was deeper in debt than it had been at the start of the bailouts.  And, once again, the Greek government was unable to make its debt payments, now to Troika institutions, without access to new loans. So, they elected Syriza in January 2015 because of the party’s commitment to negotiate a new understanding with the Troika, one that would enable the country to return to growth, which meant an end to austerity and debt relief.

Syriza entered the negotiations hopeful that the lessons of the past had been learned.  But no, the Troika refused all additional financial support unless Syriza agreed to implement yet another round of austerity.  What started out as negotiations quickly turned into a one way scolding.  The Troika continued to demand significant cuts in public spending to boost Greek government revenue for debt repayment.  Syriza eventually won a compromise that limited the size of the primary surplus required, but when they proposed achieving it by tax increases on corporations and the wealthy rather than spending cuts, they were rebuffed, principally by the IMF.

The Troika demanded cuts in pensions, again to reduce government spending.  When Syriza countered with an offer to boost contributions rather than slash the benefits going to those at the bottom of the income distribution, they were again rebuffed.  On and on it went.  Even the previous head of the IMF penned an intervention warning that the IMF was in danger of repeating its past mistakes, but to no avail.

Finally on June 25, the Troika made its final offer.  It would provide additional funds to Greece, enough to enable it to make its debt payments over the next five months in exchange for more austerity.   However, as the Greek government recognized, this would just be “kicking the can down the road.”  In five months the country would again be forced to ask for more money and accept more austerity.  No wonder the Greek Prime Minister announced he was done, that he would take this offer to the Greek people with a recommendation of a no vote.

Here is the New York Times version of events:

ATHENS — Last Friday morning [June 26], the Greek prime minister, Alexis Tsipras, gathered his closest advisers in a Brussels hotel room for a meeting that was meant to be secret. All the participants had to leave their phones outside the door to prevent leaks.

A week of tense negotiations between Greece and its creditors was coming to an end. And it was becoming increasingly clear to the left-leaning prime minister that he could not accept the tough economic terms that his lenders were demanding in exchange for new loans.

As Mr. Tsipras paced and listened on the 25th floor of the hotel, his top aides argued that neither Germany nor the International Monetary Fund wanted an agreement and that they were instead pushing Greece into default and out of the euro.

The night before, at a meeting of eurozone leaders at the European Union’s headquarters, Mr. Tsipras had asked Chancellor Angela Merkel of Germany about including debt relief with a deal, only to be rebuffed again.

This is going nowhere, the 40-year-old Greek leader said in frustration, according to people who were in the room with him. The more we move toward them, the more they are moving away from us, Mr. Tsipras said.

After hours of arguing back and forth about possible responses, Mr. Tsipras made a decision to get on a plane and go home to call a referendum, according to the people who were in the room. . . .

But a close look at the events of the last week — based on interviews with some of the participants and others briefed on the discussions — reveals an accumulation of slights, insults and missed opportunities between Greece and its creditors that led the prime minister to conclude that a deal was not possible, regardless of any concessions he might make.

Greece’s creditors see it differently, of course. In their view, Mr. Tsipras, who swept into power on a wave of anti-austerity support, was only interested in a deal that would go light on austerity measures and deliver maximum debt relief. He could not and would not comply with any agreement that required more sacrifices from the Greek people.

Still, for a week that ended with so much enmity, its start was auspicious.

That Monday, June 22, Greece’s technical team in Brussels submitted an eight-page proposal to their counterparts. The paper was an effort to bridge a six-month divide on how Greece planned to sort out its future finances.

For political reasons, the Tsipras government had said it would not cut pensions or do away with tax breaks that favored businesses serving tourists on the Greek islands. Instead, the new Greek plan envisaged a series of tax increases and increases in pension contributions to be borne by corporations.

The initial response seemed positive. Both Pierre Moscovici, a senior finance official at the European Commission who is known to be sympathetic toward Greece, and Jeroen Dijsselbloem, the head of Europe’s working group of finance ministers who is one of Greece’s harshest critics, said on Tuesday that the plan was promising.

The Greek team was elated. For the first time, the Greek numbers were adding up.

The next morning, though, that optimism evaporated.

Greece’s creditors — the I.M.F., the other eurozone nations and the European Central Bank — sent the Greek paper back and marked it in red where there were disagreements.

The criticisms were everywhere: too many tax increases, unifying value-added taxes, not enough spending cuts and more cuts needed on pension reforms.

The Greek team couldn’t believe it. The creditors had seemed to dial everything back to where the talks were six months ago. . . .

Instead of bending as the deadline neared for Greece to make a payment of 1.5 billion euros to the I.M.F., Germany and the fund appeared to be hardening their positions.

On Wednesday night, Greece was presented with a counterproposal. At the behest of the I.M.F., the tax increases had been reduced and, crucially, the government was told that it needed to increase value-added taxes on hotels.

Moreover, several requests by the Greeks to discuss debt relief had been rejected — you need to agree to reforms first, they were told.

On Thursday, Mr. Varoufakis and Mr. Tsipras agreed that they could not present this latest proposal to their cabinet back in Athens. In recent weeks, radical factions within the ruling Syriza party in Greece had become more vocal in opposing any deal that crossed certain lines on pensions and taxes.

Moreover, some within Syriza were even pushing Mr. Tsipras to walk away from Europe altogether and return to the drachma, an approach that the prime minister and Mr. Varoufakis had promised never to consider. . . .

Mr. Schäuble began criticizing Mr. Moscovici, the senior European Commission official, over his positive comments regarding the Greek offer.

Even the latest proposal from the creditors was too lenient toward the Greeks, Mr. Schäuble argued, saying that he saw little chance that he could get it past the German Bundestag, the national parliament of the Federal Republic of Germany.

The only solution here is capital controls, he said, his voice rising.

But Mr. Varoufakis persisted on the issue of Greece’s staggering debt load, ignoring the admonitions of Mr. Dijsselbloem and others.

Then Mr. Varoufakis turned on Christine Lagarde, the French director of the I.M.F.

Five years ago, the fund had given its blessing to the first bailout, doling out loans alongside Europe despite internal misgivings that Greece would be in no position to repay them.

Now the I.M.F. was pushing Greece to sign up to yet another austerity program to access more loans even though the fund had now concluded that their initial misgivings were correct: Greece’s debt was unsustainable.

I have a question for Christine, Mr. Varoufakis said to the packed hall: Can the I.M.F. formally state in this meeting that this proposal we are being asked to sign will make the Greek debt sustainable?

Yanis has a point, Ms. Lagarde responded — the question of the debt needs to be addressed. (A spokesman for the fund later said that this was not an accurate description of the exchange.)

But before she could explain, she was interrupted by Mr. Dijsselbloem.

It’s a take it or leave it offer, Yanis, the Dutch official said, peering at him through rimless spectacles.

In the end, Greece would leave it.

The Referendum

Almost immediately after the Greek government announced its plans for a referendum, the leaders of the Troika intervened in the Greek debate.  For example, as the New York Times reported:

By long-established diplomatic tradition, leaders and international institutions do not meddle in the domestic politics of other countries. But under cover of a referendum in which the rest of Europe has a clear stake, European leaders who have found Mr. Tsipras difficult to deal with have been clear about the outcome they prefer.

Many are openly opposing him on the referendum, which could very possibly make way for a new government and a new approach to finding a compromise. The situation in Greece, analysts said, is not the first time that European politics have crossed borders, but it is the most open instance and the one with the greatest potential effect so far on European unity. . . .

Martin Schulz, a German who is president of the European Parliament, offered at one point to travel to Greece to campaign for the “yes” forces, those in favor of taking a deal along the lines offered by the
creditors.

On Thursday, Mr. Schulz was on television making clear that he had little regard for Mr. Tsipras and his government. “We will help the Greek people but most certainly not the government,” he said.

European leaders actually actively worked to distort the terms of the referendum.  Greeks were voting on whether to accept or reject Troika austerity policies yet the Troika leaders claimed the vote was on whether Greece should remain in the Eurozone.  In fact, there is no mechanism for kicking a country out of the Eurozone and Syriza was always clear that it was not seeking to leave the zone.   As the Guardian explained:

One day before Greece’s bailout ends and the country’s financial lifeline melts away, Europe’s big guns have lined up one after another to tell the Greeks unequivocally that voting no in Sunday’s referendum means saying goodbye to the euro.

There was no mistaking the gravity of the situation now facing both Greece and Europe on Monday. Leaders were by turns ashen-faced, resigned, desperate and pleading with Athens to think again and pull back from the abyss.

There were also bitter attacks on Alexis Tsipras, the young Greek prime minister whose brinkmanship has gone further than anyone believed possible and left the eurozone’s leaders reeling.

One measure of the seriousness of the situation could be gleaned from the leaders’ schedules. In Berlin, Brussels, Paris and London, a chancellor, two presidents and a prime minister convened various meetings of cabinet, party leaders and top officials devoted solely to Greece.

The French president, François Hollande, was to the fore. “It’s the Greek people’s right to say what they want their future to be,” he said. “It’s about whether the Greeks want to stay in the eurozone or take the risk of leaving.”

Athens insists that this is not what is at stake in the highly complicated question the Greek government has drafted for the referendum, but Berlin, Paris and Brussels made plain that the 5 July vote will mean either staying in the euro on their tough terms or returning to the drachma.

In what was arguably the biggest speech of his career, the president of the European commission, Jean-Claude Juncker, appeared before a packed press hall in Brussels against a giant backdrop of the Greek and EU flags.

He was impassioned, bitter and disingenuous in appealing to the Greek people to vote yes to the euro and his bailout terms, arguing that he and the creditors – rather than the Syriza government – had the best interests of Greeks at heart.

Tsipras had lied to his people, deceived and betrayed Europe’s negotiators and distorted the bailout terms that were shredded when the negotiations collapsed and the referendum was called, he said.

“I feel betrayed. The Greek people are very close to my heart. I know their hardship … they have to know the truth,” he said.

“I’d like to ask the Greek people to vote yes … no would mean that Greece is saying no to Europe.”

In a country where the hardship wrought by austerity brought a sharp increase in suicides, Juncker offered unfortunate advice. “I say to the Greeks, don’t commit suicide because you’re afraid of dying,” he said.

Juncker’s extraordinary performance sounded and looked as if he were already mourning the passing of a Europe to which he has dedicated his long political career. His 45-minute speech was both proprietorial and poignant about his vision, which seems to be giving way to a rawer and rowdier place.

That was clear from the trenchant remarks of Sigmar Gabriel, Germany’s vice-chancellor and the head of the country’s Social Democratic party. He coupled the Greek situation with last week’s foul tempers over immigration and said that Europe faces its worst crisis since the EU’s founding treaty was signed in Rome in 1957.

Gabriel was the first leading European politician to voice what many think and say privately about Tsipras – that the Greek leader represents a threat to the European order, that his radicalism is directed at the politics of mainstream Europe and that he wants to force everyone else to rewrite the rules underpinning the single currency.

The unspoken message was that Tsipras is a dangerous man on a mission who has to be stopped.

Standing alongside his boss, Angela Merkel, as if to send a joint nonpartisan national signal from Germany, Gabriel said that if the Greek people vote no on Sunday, they would be voting “against remaining in the euro”.

Unlike Juncker and Hollande, who pleaded with the Greek people to reject Tsipras’s urging of a no vote, the German leaders sounded calmly resigned to the rupture.

For Merkel, it was clear that the single currency’s rulebook was much more important than Greece. In this colossal battle of wills, Tsipras could not be allowed to prevail.

Having whipped up popular fears of an end to the euro, some Greeks began talking their money out of the banks.  On June 28, the European Central Bank then took the aggressive step of limiting its support to the Greek financial system.

This was a very significant and highly political step.  Eurozone governments do not print their own money or control their own monetary systems.  The European Central Bank is in charge of regional monetary policy and is duty bound to support the stability of the region’s financial system.  By limiting its support for Greek banks it forced the Greek government to limit bank withdrawals which only worsened economic conditions and heightened fears about an economic collapse.  This was, as reported by the New York Times, a clear attempt to influence the vote, one might even say an act of economic terrorism:    

Some experts say the timing of the European Central Bank action in capping emergency funding to Greek banks this week appeared to be part of a campaign to influence voters.

“I don’t see how anybody can believe that the timing of this was coincidence,” said Mark Weisbrot, an economist and a co-director of the Center for Economic and Policy Research in Washington. “When you restrict the flow of cash enough to close the banks during the week of a referendum, this is a very deliberate move to scare people.”

Then on July 2, 3 days before the referendum, an IMF staff report on Greece was made public.  Echos of 2010, the report made clear that Troika austerity demands were counterproductive.  Greece needed massive new loans and debt forgiveness.  The Bruegel Institute, a European think tank, offered the following summary and analysis of the report:

On July 2, the IMF released its analysis of whether Greek debt was sustainable or not.  The report said that Greek debt was not sustainable and deep debt relief along with substantial new financing were needed to stabilize Greece. In reaching this new assessment, the IMF stated it had learned many lessons. Among them: Greeks would not take adequate structural reforms to spur growth, they would not sell enough of their assets to repay their debt, and they were unable to undertake sufficient fiscal austerity. That left no choice but to grant Greece greater debt relief and to provide new financing to tide Greece over till it could stand on its own feet. The relief, the IMF, says must be provided by European creditors while the IMF is repaid in whole.

The IMF’s report is important because it reveals that the creditors negotiated with Greece in bad faith.  For months, a haze was allowed to settle over the question of Greek debt sustainability. The timing of the report’s release—on the eve of a historic Greek referendum, well after the technical negotiations have broken down—suggests that there was no intention to allow a sober analysis of the Greek debt burden. Paul Taylor of Reuters tells us that the European authorities worked hard to suppress it and Landon Thomas of the New York Times reports that, until a few days ago, the IMF had played along.

As a result, the entire burden of adjustment was to fall on the Greeks before any debt reduction could even be contemplated. This conclusion was based on indefensible economic logic and the absence of the IMF’s debt sustainability analysis intentionally biased the negotiations. . . .

But, of course, as the IMF now makes clear, if a country has to repay about 4 percent of its income each year over the next 40 years and that country has poor growth prospects precisely because repaying that debt will lower growth, then debt is not sustainable. If this report had been made public earlier, the tone of the public debate and the media’s boorish stereotyping of Greeks and its government would have been balanced by greater clarity on the Greek position.

But the problem with the IMF report is much more serious. Its claims to having learned lessons from the past years are as self-serving as its call on other creditors to provide the debt relief. The report insistently points at the Greek failings but fails to ask if the creditors misdiagnosed the Greek patient and continued to damage Greek economic recovery. Protected by the authority and respect that the IMF commands, it is easy to lay the blame on the Greeks whose rebuttals are treated as more hysterical outbursts of an (ultra) “radical” government. . . .

This is why the IMF’s latest report is disingenuous. The report says that growth in Greece has failed to materialize because Greeks are incapable of undertaking sustained structural reforms. There is so much that is wrong with that statement. First, my colleague Zsolt Darvas of Bruegel argues persuasively that the Greeks have, in fact, undertaken significant structural reform. He notes that the “Doing Business” index has improved materially and labor markets are now more flexible than in Germany. Second, the IMF had set unrealistically high expectations of structural reforms: productivity was to jump from the lowest in the euro area to among the highest in a short period of time and labor participation rates were to jump to the German level. Again, the IMF’s own research department cautions that the dividends from structural reforms are weak and take time to work their way through (see box 3.5 in this link). The debt-deflation cycle works immediately. If it has taken decades for Greece to reach its low efficiency levels, it was irresponsible to assume that early reforms would turn it around in a few years. Finally, when an economy spirals down in a debt-deflation cycle, demand falls and that, in itself, will show up in the less productive use of resources. So, it is even possible that productivity has increased more but is being drowned by shrinking demand.

In other words, the leaders of the Troika were insisting on policies that the IMF’s own staff viewed as misguided.  Moreover, as noted above, European leaders desperately but unsuccessfully tried to kill the report.  Only one conclusion is possible: the negotiations were a sham.

The Troika’s goals were political: they wanted to destroy Syriza because it represented a threat to a status quo in which working people suffer to generate profits for the region’s leading corporations.  It apparently didn’t matter to them that what they were demanding was disastrous for the people of Greece.  In fact, quite the opposite was likely true: punishing Greece was part of their plan to ensure that voters would reject insurgent movements in other countries, especially Spain.

The Vote

And despite, or perhaps because of all of the interventions and threats highlighted above, the Greek people stood firm.  As the headlines of a Bloomberg news story proclaimed: “Varoufakis: Greeks Said ‘No’ to Five Years of Hypocrisy.”

The Greek vote was a huge victory for working people everywhere.

Now, we need to learn the lessons of this experience.  Among the most important are: those who speak for dominant capitalist interests are not to be trusted.  Our strength is in organization and collective action.  Our efforts can shape alternatives.