Greece and the Crisis of Europe: Which Way Out?

By Marjolein van der Veen | May/June 2013

This article is from Dollars & Sense: Real World Economics, available at http://www.dollarsandsense.org

This article is from the May/June 2013 issue of Dollars & Sense magazine.

The Greek economy has crashed, and now lies broken on the ground. The causes of the crisis are pretty well understood, but there hasn’t been enough attention to the different possible ways out. Our flight crew has shown us only one emergency exit—one that is just making things worse. But there is more than one way out of the crisis, not just the austerity being pushed by the so-called “Troika” (the International Monetary Fund (IMF), European Commission, and European Central Bank (ECB)). We need to look around a bit more, since—as they say on every flight—the nearest exit may not be right in front of us. Can an alternative catch hold? And, if so, will it be Keynesian or socialist?

The origins of Greece’s economic crisis are manifold: trade imbalances between Germany and Greece, the previous Greek government’s secret debts (hidden with the connivance of Wall Street banks), the 2007 global economic crisis, and the flawed construction of the eurozone (see sidebar). As the crisis has continued to deepen, it has created a social disaster: Drastic declines in public health, a rise in suicides, surging child hunger, a massive exodus of young adults, an intensification of exploitation (longer work hours and more work days per week), and the rise of the far right and its attacks on immigrants and the LGBT community. Each new austerity package brokered between the Greek government and the Troika stipulates still more government spending cuts, tax increases, or “economic reforms”—privatization, increases in the retirement age, layoffs of public-sector workers, and wage cuts for those who remain.

While there are numerous possible paths out of the crisis, the neoliberal orthodoxy has maintained that Greece had no choice but to accept austerity. The country was broke, argued Troika officials, economists, and commentators, and this tough medicine would ultimately help the Greek economy to grow again. As Mark Weisbrot of the Center for Economic and Policy Research (CEPR) put it, “[T]he EU authorities have opted to punish Greece—for various reasons, including the creditors’ own interests in punishment, their ideology, imaginary fears of inflation, and to prevent other countries from also demanding a ‘growth option.’” By focusing on neoliberal solutions, the mainstream press controls the contours of the debate. Keynesian remedies that break with the punishment paradigm are rarely discussed, let alone socialist proposals. These may well gain more attention, however, as the crisis drags on without end.

Neoliberal Solutions

Causes of Greece’s Deepening Crisis

Trade imbalances. Germany’s wage restraint policies and high productivity made German exports more competitive (cheaper), resulting in trade surpluses for Germany and deficits for Greece. Germany then used its surplus funds to invest in Greece and other southern European countries. As German banks shoveled out loans, Greek real estate boomed, inflation rose, their exports became less competitive, and the wealthy siphoned money abroad. Hidden debt. To enter the eurozone in 2001, Greece’s budget deficit had to be below the threshold (3% of GDP) set by the Maastricht Treaty. In 2009 the newly elected Panhellenic Socialist Movement (PASOK) government discovered that the outgoing government had been hiding its deficits from the European authorities, with the help of credit default swaps sold to it by Goldman Sachs during 2002-06 (see box, p. 13). The country was actually facing a deficit of 12% of GDP, thanks to extravagant military spending and tax cuts for (and tax evasion by) the rich. Global crisis. When the 2007 global economic crisis struck, Greece was perhaps the hardest-hit country. Investments soured, banks collapsed, and loans could not be repaid. Debt-financed household consumption could no longer be sustained. Firms cut back on investment spending, closed factories, and laid off workers. Output has fallen 20% since 2007, the unemployment rate is now above 25% (for youth, 58%), household incomes have fallen by more than a third in the last three years, and government debt has surpassed 175% of GDP. The eurozone trap. Greece’s government could do little on its own to rescue its economy. With eurozone countries all using the same currency, individual countries could no longer use monetary policy to stimulate their economies (e.g., by devaluing the currency to boost exports or stimulating moderate inflation to reduce the real debt burden). Fiscal policy was also weakened by the Maastricht limits on deficits and debt, resulting in tight constraints on fiscal stimulus.

Despite the fact that 30 years of neoliberalism resulted in the worst economic crisis since the Great Depression, neoliberals are undaunted and have remained intent on dishing out more of the same medicine. What they offered Greece were bailouts and haircuts (write-downs of the debt). While the country—really, the country’s banks—got bailouts, the money flowed right back to repay lenders in Germany, France, and other countries. Very little actually went to Greek workers who fell into severe poverty. The bailouts invariably came with conditions in the form of austerity, privatization (e.g., water systems, ports, etc.), mass public-sector layoffs, labor-market “flexibilization” (making it easier to fire workers), cutbacks in unemployment insurance, and tax reforms (lowering corporate taxes and raising personal income and sales taxes). In sum, the neoliberal structural- adjustment program for Greece shifted the pain onto ordinary people, rather than those most responsible for causing the crisis in the first place.

Austerity and internal devaluation. With steep cuts in government spending, neoliberal policy has been contracting the economy just when it needed to be expanded. Pro-austerity policy makers, however, professed their faith in “expansionary austerity.” Harvard economists Alberto Alesina and Silvia Ardagna claimed that austerity (especially spending cuts) could lead to the expectation of increased profits and so stimulate investment. The neoliberals also hoped to boost exports through “internal devaluation” (wage cuts, resulting in lower costs and therefore cheaper exports). An economist with Capital Economics in London claimed that Greece needed a 30–40% decline in real wages to restore competitiveness. A fall in real wages, along with the out-migration of workers, the neoliberals suggested, would allow labor markets to “clear” at a new equilibrium. Of course, they neglected to say how long this would take and how many workers would fall into poverty, get sick, or die in the process.

Meanwhile, international financial capitalists (hedge funds and private-equity firms) have been using the crisis as an opportunity to buy up state assets. The European Commission initially expected to raise €50 billion by 2015 from the privatization of state assets, now being revised downward to just over €25 billion through 2020. The magnitude of the fire sale in Greece is still five to ten times larger than that expected for Spain, Portugal, and Ireland. Domestic private companies on the brink of bankruptcy are also vulnerable. As the crisis drags on, private-equity and hedge-fund “vulture capitalists” are swooping in for cheap deals. The other neoliberal reforms—labor and pension reforms, dismantling of the welfare state, and tax reforms—will also boost private profits at the expense of workers.

Default and exit from the euro. Another possible solution was for Greece to default on its debt, and some individuals and companies actively prepared for such a scenario. A default would lift the onerous burden of debt repayment, and would relieve Greece of complying with all the conditions placed on it by the Troika. However, it would likely make future borrowing by both the public and private sectors more difficult and expensive, and so force the government to engage in some sort of austerity of its own.

Some economists on the left have been supportive of a default, and the exit from the euro and return to the drachma that would likely follow. One such advocate is Mark Weisbrot, who has argued that “a threat by Greece to jettison the euro is long overdue, and it should be prepared to carry it out.” He acknowledges there would be costs in the short term, but argues they would be less onerous “than many years of recession, stagnation, and high unemployment that the European authorities are offering.” A return to the drachma could restore one of the tools to boost export competitiveness—allowing Greece to use currency depreciation to lower the prices of its exports. In this sense, this scenario remains a neoliberal one. (Many IMF “shock therapy” programs have included currency devaluations as part of the strategy for countries to export their way out of debt.)

The process of exit, however, could be quite painful, with capital flight, bank runs, black markets, significant inflation as the cost of imports rises, and the destruction of savings. There had already been some capital flight—an estimated €72 billion left Greek banks between 2009 and 2012. Furthermore, the threat of a Greek exit created fear of contagion, with the possibility of more countries leaving the euro and even the collapse of the eurozone altogether. This might be welcomed by some Americans, who fear the euro as a possible rival to the U.S. dollar as a global reserve currency, threatening all the benefits that the privileged status of the dollar confers. But the collapse of the eurozone would add more chaos to a region already in crisis.

Keynesian Solutions

By late 2012, Keynesian proposals were finally being heard and having some impact on policymakers. Contrary to the neoliberal austerity doctrine, Keynesian solutions typically emphasize running countercyclical policies—especially expansionary fiscal policy (or fiscal “stimulus”), with deficit spending to counter the collapse in private demand. However, the Greek government is already strapped with high deficits and the interest rates demanded by international creditors have spiked to extremely high levels. Additional deficit spending would require that the ECB (or the newly established European Stability Mechanism (ESM)) intervene by directly buying Greek government bonds to bring down rates. (The ECB has been lending to private banks at low rates, to enable the banks to buy public bonds.) In any case, a Keynesian approach ideally would waive the EU’s deficit and debt limits to allow the Greek government more scope for rescuing the economy.

Alternatively, the EU could come forward with more grants and loans, in order to fund social-welfare spending, create employment, and boost demand. This kind of bailout would not go to the banks, but to the people who are suffering from unemployment, cuts in wages and pensions, and poverty. Nor would it come with all the other conditions the neoliberals have demanded (privatization, layoffs, labor-market reforms, etc). The European Investment Bank could also help stimulate new industries, such as alternative energy, and help revive old ones, such as tourism, shipping, and agriculture. In a European Union based on solidarity, the richer regions of Europe would help out poorer ones in a crisis (much as richer states in the United States make transfers to poorer ones, mostly without controversy).

The Role of Goldman Sachs

Greece was able to “hide” its deficits thanks to Goldman Sachs, which had sold financial derivatives called credit-default swaps to Greece between 2002 and 2006. The credit-default swaps operated a bit like subprime loans, enabling Greece to lower its debts on its balance sheets, but at very high borrowing rates. Goldman Sachs had sales teams selling these complicated financial instruments not just to Greece, but to many gullible municipalities and institutions throughout Europe (and the United States), who were told that these deals could lower their borrowing costs. For Greece, the loans blew up in 2008–2009, when interest rates rose and stock markets collapsed. Among those involved in these deals included Mario Draghi (now President of the ECB), who was working at the Greece desk at Goldman Sachs at the time. While these sales generated huge profits for Goldman Sachs, the costs are now being borne by ordinary Greek people in the form of punishing austerity programs. (For more on Goldman Sachs’s role, see part four of the PBS documentary “Money, Power, Wall Street.”)

Even some IMF officials have finally recognized that austerity is not working. An October 2012 IMF report admitted that the organization had underestimated the fiscal policy multiplier—a measure of how much changes in government spending and taxes will affect economic growth—and therefore the negative impact of austerity policies. By April 2013, economists at UMass-Amherst found serious mistakes in research by Harvard economists Carmen Reinhart and Kenneth Rogoff, alleging that debt-to-GDP ratios of 90% or more seriously undermine future economic growth. Reinhart and Rogoff’s claims had been widely cited by supporters of austerity for highly indebted countries. So yet another crack emerged in the pillar supporting austerity policies.

Keynesians have argued, contrary to the “internal devaluation” advocates, that the reduction in real wages just depressed aggregate demand, and made the recession deeper. Economists such as Nobel laureate Paul Krugman proposed that, instead, wages and prices be allowed to rise in the trade-surplus countries of northern Europe (Germany and the Netherlands). This would presumably make these countries’ exports less competitive, at some expense to producers of internationally traded goods, though possibly boosting domestic demand thanks to increased wages. Meanwhile, it would help level the playing field for exporters in the southern countries in crisis, and would be done without the punishing reductions in real wages demanded by the Troika. The Keynesian solution thus emphasized stimulating domestic demand through fiscal expansion in both the northern and southern European countries, as well as allowing wages and prices to rise in the northern countries.

Signs pointing in this direction began to emerge in spring 2013, when some Dutch and German trade unions won significant wage increases. In addition, the Dutch government agreed to scrap its demands for wage restraint in some sectors (such as the public sector and education) and to hold off at least until August on its demands for more austerity. Another €4.5 billion cuts had been scheduled for 2014, after the government spent €3.7 billion in January to rescue (through nationalization) one of the country’s largest banks.

Socialist Solutions

For most of the socialist parties in Greece and elsewhere in Europe, the neoliberal solution was clearly wrong-headed, as it worsened the recession to the detriment of workers while industrial and finance capitalists made out like bandits. Greece’s Panhellenic Socialist Movement (PASOK) was an exception, going along with austerity, structural reforms, and privatization. (Its acceptance of austerity lost it significant support in the 2012 elections.) Other socialists supported anything that alleviated the recession, including Keynesian prescriptions for more deficit spending, higher wages, and other policies to boost aggregate demand and improve the position of workers. Greece’s SYRIZA (a coalition of 16 left-wing parties, whose support surged in the 2012 elections) called for stopping austerity, renegotiating loan agreements, halting wage and pension cuts, restoring the minimum wage, and implementing a type of Marshall Plan-like investment drive. In many ways, these proposale resemble standard Keynesian policies—which have historically served to rescue the capitalist system, without challenging its inherent exploitative structure or vulnerability to recurrent crisis.

While Keynesian deficit-spending could alleviate the crisis in the short-term, who would ultimately bear the costs—ordinary taxpayers? Workers could end up paying for the corruption of the Greek capitalist class, who pushed through tax cuts, spent government funds in ways that mainly benefited themselves, and hid money abroad. Many socialists argued that the Greek capitalists should pay for the crisis, through increased taxes on wealth, corporate profits, and financial transactions, and the abolition of tax loopholes and havens. As SYRIZA leader Alexis Tsipras put it, “It is common knowledge among progressive politicians and activists, but also among the Troika and the Greek government, that the burden of the crisis has been carried exclusively by public and private sector workers and pensioners. This has to stop. It is time for the rich to contribute their share... .”

Slowly, the right-wing government began making gestures in this direction. In 2010, French finance minister Christine Lagarde had given a list of more than 2,000 Greeks with money in Swiss bank accounts to her Greek counterpart George Papaconstantinou, of the PASOK government. Papaconstantinou sat on it and did nothing. But in the fall of 2012 the so-called “Lagarde list” was published by the magazine Hot Doc, leading to fury among ordinary Greeks against establishment political leaders (including the PASOK “socialists”) who had failed to go after the tax dodgers. Another list of about 400 Greeks who had bought and sold property in London since 2009 was compiled by British financial authorities at the request of the current Greek government. In total, the economist Friedrich Schneider has estimated that about €120 billion of Greek assets (about 65% of GDP) were outside the country, mostly in Switzerland and Britain, but also in the United States, Singapore, and the Cayman Islands. The government also started a clamp down on corruption in past government expenditures. In the Spring of 2013, two politicians (a former defense minister and a former mayor of Thessaloniki, the country’s second-largest city) were convicted on corruption charges.

Socialists have also opposed dismantling the public sector, selling off state assets, and selling Greek firms to international private-equity firms. Instead of bailouts, many socialists have called for nationalization of the banking sector. “The banking system we envision,” SYRIZA leader Alexis Tsipras announced, “will support environmentally viable public investment and cooperative initiatives... . What we need is a banking system devoted to the public interest—not one bowing to capitalist profit. A banking system at the service of society, a banking system that serves as a pillar for growth.” While SYRIZA called for renegotiating the Greece’s public debt, it favored staying in the euro.

Cooperatives Around the World

Efforts at transforming capitalist firms into cooperatives or worker-directed enterprises can draw upon successes in the Basque Country (Spain), Argentina, Venezuela, and elsewhere. The Mondragón Cooperative Corporation, centered in the Basque country, has grown since its founding, in the 1950s, to 85,000 members working in over 300 enterprises. In Venezuela, the Chávez government promoted the development of cooperatives. The total number surged more than 100-fold, to over 100,000, between 1998 and 2006, the last year for which data are available. In Argentina, after 2001, failing enterprises were taken over (or “recovered”) by workers and turned into cooperatives. The recovered enterprises boasted a survival rate of about 93%. By 2010, 205 of these cooperatives employed a total of almost 10,000 workers.

Other socialist parties have put forth their own programs that go beyond Keynesian fiscal expansion, a more equitable tax system, and even beyond nationalizing the banks. For instance, the Alliance of the Anti-Capitalist Left (ANTARSYA) called for nationalizing banks and corporations, worker takeovers of closed factories, canceling the debt, and exiting the euro. The Communist Party of Greece (KKE) proposed a fairly traditional Marxist-Leninist program, with socialization of all the means of production and central planning for the satisfaction of social needs, but also called for disengagement from the EU and abandoning the euro. The Trotskyist Xekinima party called for nationalizing not just the largest banks, but also the largest corporations, and putting them under democratic worker control.

Those within the Marxist and libertarian left, meanwhile, have focused on turning firms, especially those facing bankruptcy, into cooperatives or worker self-directed enterprises. Firms whose boards of directors are composed of worker-representatives and whose workers participate in democratic decision-making would be less likely to distribute surpluses to overpaid CEOs or corrupt politicians and lobbyists, or to pick up and relocate to other places with lower labor costs. While worker self-directed enterprises could decide to forego wage increases or to boost productivity, in order to promote exports, such decisions would be made democratically by the workers themselves, not by capitalist employers or their representatives in government. And it would be the workers themselves who would democratically decide what to do with any increased profits that might arise from those decisions.

One Greek company that is trying to survive as a transformed worker cooperative is Vio.Me, a building materials factory in Thessaloniki. In May 2011 when the owners could no longer pay their bills and walked away, the workers decided to occupy the factory. By February 2013, after raising enough funds and community support, the workers started democratically running the company on their own. (They do not intend to buy out the owners, since the company owed the workers a significant amount of money when it abandoned the factory.) They established a worker board, controlled by workers’ general assemblies and subject to recall, to manage the factory. They also changed the business model, shifting to different suppliers, improving environmental practices, and finding new markets. Greek law currently does not allow factory occupations, so the workers are seeking the creation of a legal framework for the recuperated factory, which may enable more such efforts in the future. Vio.Me has received support from SYRIZA and the Greek Green party, from workers at recuperated factories in Argentina (see box), as well as from academics and political activists worldwide.

Whither Europe and the Euro?

As Europe faces this ongoing crisis, it is also grappling with its identity. On the right are the neoliberal attempts to dismantle the welfare state and create a Europe that works for corporations and the wealthy—a capitalist Europe more like the United States. In the center are Keynesian calls to keep the EU intact, with stronger Europe-wide governance and institutions. These involve greater fiscal integration, with a European Treasury, eurobonds (rather than separate bonds for each country), European-wide banking regulations, etc. Keynesians also call for softening the austerity policies on Greece and other countries.

Proposals for European consolidation have inspired criticism and apprehension on both the far right and far left. Some on the far right are calling for exiting the euro, trumpeting nationalism and a return to the nation state. The left, meanwhile, voices concern about the emerging power of the European parliament in Brussels, with its highly paid politicians, bureaucrats, lobbyists, etc. who are able to pass legislation favoring corporations at the expense of workers. Unlike the far right however, the left has proposed a vision for another possible united Europe—one based on social cohesion and inclusion, cooperation and solidarity, rather than on competition and corporate dominance. In particular, socialists call for replacing the capitalist structure of Europe with one that is democratic, participatory, and embodies a socialist economy, with worker protections and participation at all levels of economic and political decision-making. This may very well be the best hope for Europe to escape its current death spiral, which has it living in terror of what the next stage may bring.

is an economist who has taught economics in Massachusetts, the Seattle area, and in the Netherlands.

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