Home > Greece > European authorities refuse to let Greek economy recover, making eventual Grexit more likely

European authorities refuse to let Greek economy recover, making eventual Grexit more likely

from Mark Weisbrot

The battle over the future of Europe – currently centered in Greece – is far from over. But, with the tentative deal that has been struck between the Syriza government and European authorities, it has certainly entered a new phase.

Prior to the July 5 referendum, European officials had been carrying out a strategy of “regime change.” Deadlines came and went, and threats of a forced Grexit were mainly bluff, despite the fact that the most powerful leader of the eurogroup of finance ministers, Germany’s Wolfgang Schäuble, seemed to favor it. The strategy of regime change looked relatively easy: the European Central Bank (ECB), by restricting credit, together with the standoff and rumors of Grexit, had already pushed the Greek economy back into recession. It seemed only a matter of time before the economic failure, combined with anti-Syriza media coverage, would undermine support for the Greek government enough to usher in a new one.

In his first interview since his July 6 resignation from the post of Greek finance minister, Yanis Varoufakis describes “The complete lack of any democratic scruples, on behalf of the supposed defenders of Europe’s democracy,” i.e., his eurozone negotiating partners. They continuously “delayed and then came up with the kind of proposal you present to another side when you don’t want an agreement.” 
On June 26, Greek Prime Minister Alexis Tsipras called their bluff by announcing the referendum, which on July 5 produced a landslide “no” vote against further austerity and regressive “reforms.” This made regime change a somewhat more cumbersome strategy: If you are going to get rid of a government by wrecking the economy, the people have to blame the government rather than the officials who are wrecking the economy. But the vote showed that Greeks saw who was responsible for their misery, especially after the ECB, in an effort to intimidate voters, forced a closure of the banking system – something it had not done in the past six years of crisis and depression.

This strengthened the position within the European camp of Schäuble and his allies who favored an “out now” solution. Tsipras was faced with a choice, it appears: to accept the European authorities’ terms, or be forced out of the euro as the ECB continued to destroy the Greek banks and financial system. It was a hostage situation. He chose to surrender, defending his decision on the grounds that although the voters had clearly rejected austerity, they also did not want to leave the euro.

But the current deal, if it holds, almost certainly will not allow for the Greek economy to recover. The primary budget surplus targets of 2, 3, and 3.5 percent of GDP for the three years of the deal, 2016 through 2018, will make sure of that, given that the country is running a primary budget deficit right now. Of course, the government is unlikely to be able to meet these targets as the economy and therefore government revenues shrink. The Financial Times estimates that primary surpluses will contribute just 4.5 billion euros over the three years. Even if this estimate turns out to be low, this is a small part of a package currently estimated at 86 billion euros.

The fact that European officials are willing to keep the Greek economy indefinitely stuck in a depression for such a small fraction of the money that they are putting up – really pocket change relative to their resources – should be an eye-opener for anyone who is following the drama. It means that the European authorities are really not interested in an economic recovery in Greece in the near future. It also indicates that this fight is not mostly about the debt itself, but part of a much larger political struggle over what kind of society Greeks (and tens of millions of other Europeans) will live in.

The European authorities have now made it clear that – so long as they are in control of Greece’s economic policy – the country’s depression and mass unemployment will continue indefinitely.

Even further debt relief, which is not yet part of the deal, will not improve the situation over the next three years, since it is very unlikely to reduce interest payments during this period.

So what can be done? In his post-exit interview, Varoufakis describes three steps that he advocated in response to the ECB forcing the closure of Greek banks:

“We should issue our own IOUs, or even at least announce that we’re going to issue our own euro-denominated liquidity; we should haircut the Greek 2012 bonds that the ECB held, or announce we were going to do it; and we should take control of the Bank of Greece [the Greek central bank].”

These were steps in the direction of leaving the euro, but not irreversible ones. They were moves that would help prepare the government to keep the economy functioning in the absence of an agreement with the creditors. They would also show that Greece was not completely at the creditors’ mercy.

But Varoufakis was outvoted, he said. He also noted that although there was a small team that had worked on the details of an exit from the euro, “To prepare the country an executive decision had to be taken, and that decision was never taken.”

Such preparation would now appear to be prudent, since the masks have come off and the whole world can see how mean and ruthless the current leadership of the eurozone is willing to be in order to impose their own brand of economic order on the common currency area. If Greece left the euro, things would likely get worse before they got better, but the economy would recover.

As is well known, Argentina suffered a very severe financial crisis after it defaulted on its debt at the end of 2001 and de-linked its currency from the dollar in January of 2002. However, the economy was growing three months later, and went on to grow 63 percent over the ensuing six years – one of the fastest rates of growth [PDF] in the world during this period. Contrary to popular belief, growth was not driven by a “commodities boom” nor by exports. Although Greece has more exports as a percent of GDP than Argentina did, and would benefit from a devaluation, the main boost to recovery – as in Argentina – would come from being able to escape from the destructive economic policies imposed by foreigners. (Argentina had just one-third of the troika to deal with – the IMF – but it was a pretty deadly constraint.)

Some economists have correctly noted that a default and devaluation that involves creating a new currency presents additional challenges, as compared with Argentina’s abandoning the peso/dollar peg. But this does not change the basic story. A developed economy does not transform itself overnight into a failed state, simply because it exits from a currency union. We can look at the worst financial crises over the past 25 years, and none of them resulted in the kind of economic damage that Greece has already suffered. It is not clear why anyone would argue that Greece would be worse off leaving the euro than it would be three years from now if it were to follow the economic program that it is currently finalizing with the European authorities.

Meanwhile, despite the unconditional surrender of the Syriza government and the parliament’s approval of the hated austerity measures that the European authorities demanded, the ECB did not increase its Emergency Liquidity Assistance to Greek banks so that they could open. The banks remain closed today (Thursday). The ECB appears to be in no hurry to let up on the accelerated economic damage that it has been deliberately inflicting on the Greek economy over the past few weeks in order to force this agreement.

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  1. July 19, 2015 at 6:04 pm

    It is an excellent article on the Greek drama whose analysis I sign without any hesitation. Since the beginning of the Greek crisis I was and continue being in favour of a return to our national currency, as I am persuaded that it is the only way for my country to be saved. However, the propaganda against this solution was and continues to be strongly dishonest, terrifying the people as to the consequences . I am wondering whose interests the media are representing, pretending that economists declaring in favour of the drachma belong to a…..maffia. This awful propaganda did not allow Greek people to adopt a reasonable solution to their problems and the result is that 70% of the population have a terrible fear of the drachma and want to remain with the euro at any cost. This must be the reason for which our PM finally accepted this Criminal 3rd memorandum.

  2. Calgacus
    July 20, 2015 at 12:32 am

    He chose to surrender, defending his decision on the grounds that although the voters had clearly rejected austerity, they also did not want to leave the euro.

    Such a position – that Greeks did not reject austerity, even unto Grexit – is basically indefensible.
    There’s a simple answer to Merijn Knibbe’s question here a week ago:
    “Why do the Greek want to keep the Euro so badly?”
    They don’t.

    Stathis Kouvelakis says in his very important recent Jacobin interview Greece: The Struggle Continues:
    “So it’s completely irrational to say that the people voting for No were not in the very least taking the risk of a possible exit from the euro if that was the condition for saying “no” to further austerity measures.”

    All sources agree that the closure of the banks substantially decreased the NO vote. Before that Kouvelakis says “The general sense was that the referendum would be won overwhelmingly, by over 70 percent.” Taking that figure, the logical conclusion is that 70% rejected austerity, and 61+% rejected austerity, even if it meant Grexit.

    According to Spyros Marketos of Antarsya:
    This is a Betrayal: Interview with Professor Spyros Marketos

    JT [Joshua Tartakovsky]: How would you respond to the argument that Tsipras did what he did because most Greeks want to stay in the Euro and therefore he did not have a mandate to leave the Euro?

    SM [Spyros Maketos]: It was very clear that 61.3 percent that voted in the referendum did this in full cognizance of the fact that almost everybody told them that the consequences would be to get out of the Euro, if they vote No. They voted No anyway. This was a referendum, it was not a Gallup poll. Everyone, behaves, in the government and media, as if it was just a Gallup poll, a survey. Something that disappeared that they don’t talk about. They try to make the people forget about it, but the people did not forget about the referendum. They knew that probably, a consequence of a No, would be a Grexit and yet they voted. And even Tsipras stated this at some point.

    And speaking of Gallup polls – Here is the Gallup International End of year 2014 poll
    Page 4: 52% of Greeks prefer national currency over the euro, Euro preferred by only by 32%

    To say that the referendum wasn’t a referendum on the Euro is to say that Greeks are idiots, in both the classical and modern senses.

  3. July 20, 2015 at 2:25 am

    Schäuble, seemed to favor it? Is that an understatement, or, what?

    And it is hundreds of millions of Europeans who will loose universal health care and be reduced to the semi-slavery of US citizens, if Greece, the first democracy on Earth, relents and lets a Eurexit happen. The real question is, Will the oldest democracy on Earth once again let corporatism unleash austerity backed by military adventure?

    Change the story. Recognize the need for real democracy with sufficient power to debilitate corporatist totalitarianism. Define information-age democracy and design the institutionalized aspects. The troika in alliance with every hierarchy is not equal to the distributed human intelligence of focused greeks and world solidarity.

    Αλλάξτε την ιστορία. Αναγνωρίζουμε την ανάγκη για πραγματική δημοκρατία με επαρκή ισχύ για να εξασθενίσει συντεχνιακό ολοκληρωτισμό. Ορίζει τις πληροφορίες σε ηλικία δημοκρατία και θεσμοθετείται τις πτυχές του σχεδιασμού. Η τρόικα σε συμμαχία Με κάθε ιεραρχία δεν είναι ίση με την ανθρώπινη νοημοσύνη του επικεντρώθηκε διανέμονται Έλληνες και παγκόσμιας αλληλεγγύης.

    Cambiar la historia. Reconocer la necesidad de una verdadera democracia con el poder suficiente para debilitar el totalitarismo corporativista. Definir la democracia era de la información y el diseño de los aspectos institucionalizados. La troika en alianza con cada jerarquía no es igual a la inteligencia humana distribuida de griegos enfocados y solidaridad mundial.

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