Greece’s patience with austerity has snapped is the verdict of the Guardian. But has patience with Greece from its creditors also snapped?
There is much sympathy for the plight of ordinary Greek citizens after one of the biggest drops in the standard of living in modern times, mass unemployment and cuts to even basic public services. There is also a sneaking admiration for a country that seems to want to take a stand against big financial interests.
But anyone who has actually looked into the figures will know that it ain’t so simple.
A case apart
Unlike many other highly indebted countries, Greece’s massive debts really were caused by profligate spending combined with very widespread tax evasion (the latter of about €20 billion a year!) It’s different from Spain and Ireland, whose public debt was even lower than Germany’s before the crisis hit, but had to bail out their banking sectors. It’s different from Italy, whose debt is largely financed internally. It’s different from Britain, because of the sheer scale of accumulated debts — double those of Britain’s — despite writing off a large chunk of Greek debt three years ago.
I recently travelled from Bulgaria to Greece. Crossing the border was to go to a country with a visibly higher standard of living. But too much of that differential was engineered by the government borrowing money to pay higher salaries, and not for investment.
Over the first decade of this century, unit labour costs rose by over 30% in Greece (compared to 5% in Germany). For public employees, this was even more striking: up 117%! It is not surprising that, as a result, prices in Greece rose by 30% above the eurozone median — a massive divergence of competitiveness. By 2011, Greece had a current account (trade) deficit of 9% of GDP.
Continuing to finance this by borrowing meant Greek public debt was well over 100% of GDP even before the world financial crisis hit Europe in 2008. By 2011, it had shot up to 170% of GDP (€355.141 bn). On the markets, no-one would lend to Greece at normal rates as the perceived risk of default rose. Greece had to ask for bailout loans from the IMF and from other Eurozone countries. It was given the largest ever loan of this kind in history: long term (30 years), low interest (1.7%) loans destined to give it time to turn the corner. It also negotiated the biggest debt restructuring in history, with the private sector writing off nearly half of the debt, which fell back to 136.5% of GDP (€280.4 bn) in the first quarter of 2012. It has risen again since then, as deficits cannot be eliminated overnight (and is back at over 170%), but Greece now has a primary surplus and did at last return to growth, after six years of economic decline, in the second quarter of 2014 — and was the Eurozone’s fastest-growing economy in the third quarter of last year. It pays 40% less interest on its loans than it did in 2010.
Deficits and debts of this magnitude are not a matter of Keynesian fine-tuning or counter-cyclical balancing. And there was little choice but to address them: this would have had to be done whether Greece was in the euro or not, in the EU or not. But it would have been even more difficult were it not for the European loans and debt write off. European solidarity actually attenuated the pain — a point often ignored!
As to leaving the euro and setting up a new national currency, the latter would presumably devalue substantially against the euro, thereby increasing the size (in its own currency) of the debts. Greece imports most of its food and nearly all its energy, so a devalued national currency could more than double the costs of such necessities, with dramatic social consequences. And even preparing for an exit from the euro would trigger wipe out its whole banking sector, with enormous knock-on effects.
But the way the deficits were eliminated left much to be desired. The thrust was on cutting expenditure, while the ultra-rich continued to avoid paying extra taxes. A gigantic defence budget (one of the highest in Europe as a percentage of GDP) was scarcely pruned as the military establishment protected its own. Above all, many Greek politicians presented unpopular measures as impositions from Brussels or Berlin, as if they would not otherwise have happened.
Unfortunately, Syriza is one of the culprits in that respect. It has come to power on a platform of rejecting austerity, just at the moment when expenditure cuts were anyway coming to an end. But Tsipras has called for more: finance from Europe for a programme that includes a ration of free electricity and heating for Greek households, food and rent subsidies, and a €13 billion plan to increase pensions . He also wants the European Central Bank to buy up Greek debt directly from the government.
And yet he also says that a Syriza government will respect Greece’s promise to maintain a balanced budget. Tsipras, along with 74% of Greeks, wants to remain in the euro.
So is there a workable way forward? Much will be decided in the coming weeks, with the deadline for the next extension of the bailout agreement commitment on 28 February. Greece’s IMF and European creditors will want Greece to stick to its agreements. But Syriza’s other goals, of cracking down on tax evasion by Greece’s wealthiest people and an overall more equitable tax system, may well find sympathy. It might also be that the dramatic fall in oil prices gives a fiscal margin (as well as the windfall to the balance of payments) that can be used. The ECB’s quantitative easing programme (especially if extended directly to Greece), the proposed Juncker investment plan, and the lower exchange rate of the euro can all help. Avoiding market panic would also do a lot — given that growth had resumed — and this is very much in Syriza’s hands. And maybe an extension of the debt repayment deadline, although not a write-off, could be conceded.
Lessons for Britain?
Are there any lessons in all this for Britain and others? Not directly, as the history, the scale and the nature of Greece’s debt problems are simply of a different magnitude. Britain has a margin of manoeuvre that Greece doesn’t. But it’s a reminder that we must not let debt levels rise beyond the danger threshold. Excessive debt is anyway undesirable, as it means a greater proportion of tax revenues are spent, not on public services, welfare or investment, but on servicing debt – the ultimate austerity!
Of course, Labour opposes savage cuts to vital public services, cuts to investments that are crucial to our future, and attacks on the most vulnerable members of society. But that doesn’t mean that we don’t want to get rid of excessive deficits. The key difference between Labour and the coalition is not about the need to cut excessive deficits, but how to do it.
The Conservatives focus exclusively on a rapid reduction of public spending, not on increasing revenue — on the contrary, they lowered the top rate of income tax. And in reducing public spending, they have targeted the most vulnerable. They have also announced their intention to keep paring back the state even beyond what would achieve a downward trajectory of debt levels (a 2% deficit with 2% economic growth and 2% inflation would see the debt/GDP ratio fall steadily). This is an ideological attack on state involvement in the economy — even where it is clear that collective provision of services is more effective (and fairer), as in health and basic education.
Labour, by contrast, will cut the deficit on both sides of the equation. First, raising revenue from the richest (and with new revelations every day about how the top 1% have accumulated ever more wealth, approaching 50% of all wealth, this is surely fair). Second, cutting expenditure in a fairer way, starting perhaps with bonuses paid to bankers with taxpayers’ money.