Monday, 6 July 2015

The Greek Disaster

You would have to have a fairly cavalier attitude to democracy to be happy about the plight of Greece, who joined the European Community in 1981 putting the horrors of a military dictatorship behind them and looking optimistically forward to a future in the Europe of liberal democracies. A generation on they are held to ransom by the ominously titled "troika" of unelected officials in the European Central Bank, the European Commission and the IMF. How did it come to this?

Firstly, there's the simple truism now obvious to all that Greece should never have been a member of the Euro. While this is partly the fault of the Greek government of the time and was eagerly supported by a population who saw it as a key step to economic stability it would not have been possible without the collusion of the European Commission and the other Eurozone states who were keen that their project should be as large as possible. This sort of crisis was predicted at the time by pretty much anyone who understood basic economic theory and didn't have a vested interest, however it was pointedly ignored by those who did have a vested interest, or who simply believed that they could overcome the economic reality of the project with the sheer political will behind it.

Secondly, there's the question of who this whole debacle has benefited. And it shouldn't come as a surprise to learn that it wasn't all 50 something Greek pensioners and ouzo sellers. In essence, Greece was locked into the Euro at an artificially high exchange rate, meaning it's exporters and its tourist industry were hampered while imports were relatively cheap. An official from the CDU gave a startlingly frank admission of this when he pointed out that Germans visiting Greece "see what the government has wasted its money on. You see these huge air-conditioned Daimler buses which go to nowhere with just one passenger." Buses produced by the German company Daimler AG, manufactured mostly in Germany, were of course also exported enthusiastically as German enjoyed the opposite effect of a currency undervalued relative to the strength of the German economy. 

Under free floating exchange rates the Drachma would have declined in value against the Deutschmark making German imports more expensive in Greece, and Greek imports (or indeed holidays) cheaper for Germans. In the straight jacket of the Euro an unsustainable bubble developed in Greece, prices rose, unemployment soared and government spending outstripped tax receipts. 

The banks who funded this splurge managed to dump their exposure onto the ECB and the IMF, in a package presented as a Greek bailout in 2010, however it now seems that this was more a bailout for the banks than for the country. 

It was quite obvious by the time of the crisis in 2009 that this situation could not continue. The first bailout came with conditions of austerity attached and each subsequent bailout has demanded greater cuts. As Yanis Varoufakis points out on his blog that over the 6 years of Greece's economic difficulties wages have fallen by some 37%, pensions by up to 48%, state employment has been slashed by 30% and consumer spending is some 33% down. By any measure, these are drastic cuts and a period of 6 years would seem like a fair trial of this method. It isn't working. In fact, as Varoufakis continues this has arguably created more problems than it has solved. Real GDP has fallen, unemployment has leaped to 27% and the black market has surged making tax collection even more difficult. Debt meanwhile has ballooned to an incredible 180% of GDP, triple the 60% ceiling laid down by Maastricht. 

Greece's mistakes are numerous and catastrophic, but there are no bad borrowers without bad lenders. Debt implies risk and, in this case, the risk did not pay off for Greece's creditors. Initially Greece's creditors were private banks, but the ludicrous decision by the ECB to buy this high-risk debt from the banks under the misleading pretext of a "bail out" for Greece has now spectacularly blown up in their faces and saddled European taxpayers with an enormous burden of debt.

What a terrific irony that this lesson in capitalism has been taught to the world by a Marxist political party running a bankrupt country.