12.02.2015

Aftermath of Syriza’s election

Azhdar Ashkan can see no long-term solution to the crisis within the current order

Since 2007, the Greek economy has experienced three recessions, which sometimes approached depression-like dimensions. Consequently, when Greece’s debt-to-GDP ratio passed 145%, Athens could no longer borrow money on the capital market to keep its system afloat.

This fact, along with Greece’s other financial difficulties, created a crisis that could have evolved into the country’s exit from the euro zone. To avert that possibility, in 2010 the European Commission, the European Central Bank and the International Monetary Fund - the so-called troika - agreed to provide Greece with a bailout. The quid pro quo was that in exchange for implementing deep structural reforms, along neoliberal lines, and embracing an extensive austerity programme, Greece would receive emergency bailout loans of €246 billion, along with other measures that would allow the Greek financial system easy access to low-interest funds.

As I am sure readers will know, among the conditions imposed on Greece were the requirement to raise taxes, the cutting of government expenditure, the implementation of structural changes, the raising of the retirement age, the running of a budget surplus and a commitment to repay government debts. Further, the continuation of the bailout programme was tied to progress in implementing austerity, as determined by monitoring and audits acceptable to the creditors. The bailout was scheduled to end in December 2014, but was extended by two months. A review of Greece’s success or otherwise in fulfilling its commitments is due by the end of February.

Ever since the onset of the austerity programme, the Greek people and the Greek economy have experienced severe pain and hardship. GDP has shrunk by 20%, Greece’s main stock index has shed roughly a fifth of its value in the past three months, depositors have withdrawn several billion euros from the country’s banking system, and government debt stands at €323 billion, or over 175% of the country’s GDP. Unemployment is above 25%, with the rate for people under 25 standing at more than 56%. Over 100,000 companies have stopped trading in Greece and many thousands of small businesses have gone under. The average wage has fallen to €600 a month and many social welfare programmes have been slashed. One third of the population is living below the poverty line, with another third barely above it. A substantial rise in homelessness, suicide, domestic violence, divorce and crime is evident.

Against this background, Syriza ran its election campaign on a platform of ending the austerity programme, improving the economic conditions of the people and renegotiating Greece’s debt. Syriza promised a great deal - the reinstatement of discontinued or scaled-down social programmes, reversal of some structural changes, an increase in pensions, a rise in general and minimum wages, the granting of tax relief to low-income people, loans to small businesses, job creation, a halt to the sale of government assets and privatisation, keeping social programme spending off the balanced budget calculation, dropping the commitment to run a high budget surplus, and many similar propositions. In short, Syriza promised to deliver relief to Greek citizens, while keeping the country in the European Union and the euro zone.

The government now wants to renegotiate and restructure the debt by rolling over the loans from short term to long term at a low interest rate. It also wants some debt forgiveness, the adjustment of the terms of debt repayment, including a grace period, along with a relaxation of the strict austerity measures imposed on the Greek populace.

Out of the total Greek debt, €53 billion has been borrowed from various euro zone countries. Any change to the terms of these loans must be negotiated individually between Greece and the country involved. This, obviously, is not an easy task and presents Syriza with a serious challenge. Another €142 billion derives from the bailout fund and the renegotiation of the terms of these covenants must be unanimously approved by all euro zone countries. A difficult task, to be sure, particularly considering who the lenders are. The largest contributor to the fund is Germany, with €56 billion, thus making it the most important factor in the process. Angela Merkel has already signalled her rejection of any restructuring of the debt and other countries in the pack - eg, the Netherlands, Finland, etc - are taking a similar stance. The share of the ECB and other European central banks is €27 billion and the ECB has stated that it would be illegal to renegotiate the terms. As for the IMF’s share of €28 billion, if past practices are any indication, it too will reject any kind of relief.

Greek banks, like other European banks, have access to funds under the Emergency Liquidity Assistance scheme. The ECB, however, has just decided that, effective from February 11, Greece is no longer exempt from the rules forbidding banks from holding low-grade bonds. Accordingly, Greek banks can no longer use government bonds as collateral for loans and thus are deprived of a major source of low-interest-rate funds. All the while, the February 28 debt service deadline is looming. (Some of the IMF loans are due in March and August, while €7 billion in bonds held by the ECB matures in July and August.)

All indications point to Greece’s inability to meet the repayment schedule. However, the troika seems unwilling to consent to any major change and this deadlock could cause creditors to decline Greek bonds, which would further limit the country’s access to low-interest financing. Such a scenario would cast doubt on the survivability of the Greek economy and lead to an unavoidable default, with ensuing capital flight, a run on Athens banks, insolvency and the eventual collapse of the Greek financial system. The resulting chaos would be felt far beyond Greece’s borders. The possibility of this outcome itself increases uncertainty and this in turn will make the recovery of an already fragile Greek economy even more remote.

Resolution?

Theoretically, the Greek debt crisis could be resolved in several ways. First, nationalisation of the debt, accompanied by radical and fundamental changes in the Greek economy. Alternatively, Greece could declare bankruptcy. Under this alternative, it might see a positive cash flow, as it would stop servicing its current debt. However, while theoretically feasible, this option cannot realistically be considered viable at this time, since it would lead to the immediate shut-off of all financing sources.

Another theoretical option would be to pursue a rapid growth and export path to bring the economy out of the debt trap and the current crisis. But this path too, by its nature, is a long-term solution and cannot be implemented at present. The Greek government and EU officials would have to address and overcome several structural obstacles within both Greece and the EU. This renders this alternative unfeasible for the time being.

A further alternative would be currency devaluation and the creation of inflationary creep. This is the alternative that both the US and UK have adopted somewhat successfully. Once again, however, since management of the currency resides with monetary authorities outside Greek jurisdiction, this alternative is not open to Greece while it remains in the euro zone.

There are many internal obstacles that stand in the way of a sustainable, long-term resolution of the Greek crisis. The short list includes corrupt institutions, inefficient and bureaucratic government apparatuses, an unfair tax system, inefficient tax collection, inadequate budgetary and fiscal procedures, insufficient recognition and enforcement of property rights, a populace that now distrusts government, and widespread expectations established over many years of working class struggle. These cultural, historical, social and political factors prevent any meaningful resolution of the problems faced by Greece. The underlying causes have not been, and probably will not be, addressed.

Parties, segments and groups blame each other for the troubles. The austerity programme, the EU, Germany are among those identified as the culprits, but no viable solution to Greece’s problems has been suggested. Nor has anyone accepted any responsibility for contributing to the crisis. Some even talk about the forgiveness of loans from Germany in place of the World War II reparations that the Germans should have paid. The previous Greek government, instead of addressing the crisis at its roots, resorted to a nationwide ‘distribution of the burden’ through tax-raising and reducing salaries across the board.

The EU structure and Greece’s creditors are also contributors to the current crisis. The prevailing neoliberal paradigm of slashing government activities and balancing the budget at all costs is the underlying factor in the Greek crisis and it constitutes a major hindrance in the path to a recovery. This prescription, and the creditors who subscribe to it, prevent the Greek government from effectively intervening to stabilise the economy by implementing an active fiscal policy. Greece is under an obligation to follow an austerity programme that chokes the economy and thwarts the possibility of any economic growth in the short or medium term.

A fundamental element in economic development and growth is the level of investment. But an unstable environment adversely affects that level, particularly in relation to foreign investment. Moreover, austerity measures prohibit the Greek government itself from devoting resources to crucial elements of investment: namely health and education. The austerity prescriptions also negatively impact on consumer demand, which is another engine of growth. Reduction in wages leads to reduction in consumption. This, coupled with the decrease in government spending and the requirement for a balanced budget, reduces aggregate demand and, just like the 1930s, transforms a mild recession into a devastating depression. The current institutional ‘deflationary bias’ inherent in the EU only exacerbates the situation.

The euro zone’s monetary system and its supranational currency, controlled by monetary authorities not accountable to any nation-state, effectively removes monetary policy tools from the hands of individual governments. The actions of these monetary authorities will favour financial markets and stronger members of the EU, while the ‘denationalised’ euro renders the Greek government incapable of meaningful intervention in economic affairs through monetary policy.

Currently, most of the bailout money received by Greece is used to service its loans. That is, Greece borrows money to pay its debt. That, essentially, turns the Greek bailout into a bailout of its lenders. Similar to Germany and eastern European countries after World War I, Greece is being crushed under the weight of its foreign obligations. The currently imposed measures of cutting government expenditure, raising taxes and producing a surplus of more than 4.5% of GDP, along with the present debt service structure, makes it impossible for Greece to recover from its malaise. Any serious plan to resolve the Greek crisis must include loosening the grip of the austerity programme, allowing some relief to the Greek people, reducing the level of the required surplus, guaranteeing future assistance, renegotiating the debt structure and rolling over the existing loans.

Syriza’s ascension to power and the potential default and exit of Greece from the euro zone will have several significant consequences for the rest of the EU as well. The Greek election result could give all anti-austerity parties a great boost and if Alexis Tsipras and co register any measurable success, voters in Spain, France, Portugal and Italy might follow the Greek path. If Syriza fails, however, the chaotic aftermath in Greece and across Europe would provide the ultra-nationalist, rightwing, anti-euro parties fertile ground upon which to grow and even potentially assume power. That would mean the ending of the euro zone and disaster for the world.

Short-term

Although the troika is taking a hard line at present, the prospect of the potential repercussions of Greek failure might persuade it to be more accommodating. Syriza itself is a coalition with appreciable internal conflicts. In addition, the populations of other EU countries do not have unlimited tolerance for austerity and will eventually insist on a permanent solution. Therefore, the window of opportunity for reaching an agreement is not very wide and will not be available for long. The crisis in Greece, and its potential exit from the EU, substantially adds to the uncertainties about the future of the EU itself and its common currency, not to mention the viability of the EU as a reliable economic and political entity. Therefore, stronger members of the EU may assume a more proactive role in promoting and facilitating general economic growth in Europe. The whole quantitative easing programme and its continuation by the ECB, which effectively devaluates the euro, might be viewed as a step in this direction.

For now, in all likelihood, after a period of tough negotiations, Greece will get some short-term relief - both in terms of its loans being extended and renegotiated, and in the shape of the easing of the austerity measures. The Greek government could offer some relief by reducing or even ending some austerity targets, and implement some reforms and house cleaning relating to tax organisation and collection, and government efficiency. The current de facto devaluation of the euro through the ECB’s quantitative easing, pumping money into the European economies, will continue and the Greek economy could show some signs of a mild recovery.

These actions, nonetheless, will not provide a long-term solution to the Greek crisis. The bomb will still be ticking. Due to the fact that structural obstacles, both in Greece and within the EU itself, are not addressed, long-term solutions remain elusive. Unless these issues are satisfactorily resolved, the burden of carrying Greece and keeping the euro zone intact will be heavier, as time goes by. The threshold of tolerance for the EU countries and their populations, sooner or later, will be crossed and Greece will eventually be forced to leave the euro zone.

The probability of resolving the obstacles are currently next to zero. Accordingly, the likelihood of a long-term resolution to the Greek crisis is about the same. The stronger members of EU are well aware of this, and quite possibly are, behind the scenes, preparing themselves for this eventuality and realignment.