Greece cannot be saved by austerity policies. There are worse things than an exit from the eurozone, writes Ray Kinsella , and one of these is remaining within it on these terms
The meeting of the eurogroup of finance ministers on Friday did nothing to resolve the Greek dimension of the eurozone crisis. There was no ‘resolution’ to the crisis — just another series of processes that paper over the internal contradictions and inequalities which now characterise the eurozone.
The Greek government has spent the weekend drawing up yet another list of ‘reforms’ which will be reviewed today by the troika, while Syriza presents the Greek parliament with a deal that falls well short of the anti-austerity mandate on which the party was elected. Even then, there are no guarantees. The deal enforced on the Greeks must be ratified by national parliaments before the end of the month. And only then will talks with creditors begin.
What Friday’s meeting did demonstrate, with icy clarity, was German hegemony. It brought to the surface the divisions that now exist at every level across Europe.
The eurozone is divided three ways, between Germany — its prosperous epicentre — the wider set of countries now impacted by deflation, and the impoverished periphery. The ECB board is split. The divide between the European Commission and Germany was evident at Friday’s crisis meeting in the very different approaches to Greece’s final proposals. The commission cautiously welcomed the proposals. Germany slammed the door on them.
The new Greek parliament is split. These divisions bode ill for general elections that will take place across a number of European countries over the next 18 months. Electorates are disillusioned. Political elites don’t listen. Extremism has gained ground.
Yanis Varoufakis, the Greek finance minister, arrived at Friday’s meeting with a democratic mandate to seek a writedown of Greece’s suffocating debt burden to a sustainable level. He sought a six-month bridging arrangement outside of the bailout to keep the country functioning while it engaged with its creditors. He was mandated to extricate Greece from the troika. The most urgent priority was immediate steps to deal with the humanitarian crisis in Greek.
The most strategically important mandate was a new medium-term growth model, within which economic adjustment could be delivered. The final proposal put before the eurozone ministers was far less ambitious.
What actually emerged was a four-month extension to the bailout, which had been scheduled to expire at the end of February, together with a demand for a set of proposals to be reviewed by the troika and a commitment “not to engage in unilateral action”. There was to be no end to the austerity, which was precisely the platform on which the government was elected.
Both sides claimed a sort of victory. The brutal reality is that Germany snuffed out the first democratically mandated anti-austerity mandated by a member state. Debt is the most effective form of control. It means that people — and countries — are dependent. That is never healthy.
Varoufakis came to the negotiation table with a broken-backed economy in meltdown. In addition to the suffocating burden of debt, its banking system was haemorrhaging deposits — €2bn a week — leaving its banking system dependent on the ECB.
On top of all of this, economic forecasts have been revised downwards. That’s after five years of austerity. There’s no way to square that circle: Greece is an economy in default mode.
The crisis meetings might have been the catalyst for a systematic review of the macroeconomic impact of austerity, and its consequences for the welfare of the Greek people and for the wider Eurozone. Instead, it was a calamitous exercise in the politics of power.
There is no single narrative that binds the tangled truths of what the eurozone has now become. The Merkel-Schäuble good cop-bad cop perspective is essentially that Greece only has itself to blame and that the hard-working and prudent German people should not, and will not, bear the costs of failings in Greek policies and institutions. Concurrently, the political rhetoric is ‘we want our Greek friends to remain within the euro’.
A more sophisticated form of this argument means responsibility for bearing the risks — and the costs — of decisions apply at the national, as well as the individual, level.
The logic of this argument is that, for the eurozone to be optimal, every member country should adopt the German model. What this means is that ‘solidarity’ — one of the defining principles of European vision — is displaced by market discipline and moral hazard (i.e. if you cut the Greeks some slack, they’ll all be at it).
The Merkel-Schäuble narrative ignores the reality that, in the long march to full political union, there are the weaker and the stronger. The weaker are countries that, having ceded exchange rate depreciation as a policy instrument, are at the sharp end of a flawed monetary union, lacking fiscal federalism.
The German narrative, which hung like a sword over the Greek crisis talks, ignored market imperfections and inequalities in corporate capitalism. They have done some damage, and not just to Greece.
There is an alternative, however. It has been set out by one of the most distinguished, principled, and experienced economists of our time: Nobel laureate Joseph Stiglitz, formerly the chief economist of the World Bank and chair of the US Council of Economic Advisers.
Greece screwed up in the run-up to, and in the early stages of, its participation in the euro. It understated its budget deficit. The Centre of European Reform observed in 2004, when Greece acknowledged its mistakes, that quite a few member states did something similar because of the political imperative to join the euro as soon as possible. Greece went a little further.
The important point here is how this happened. A celebrated New York Times article in 2010 revealed that Wall Street tactics — akin to the ones that fostered subprime mortgages in the US — worsened the (Greek) financial crisis and undermined the euro by enabling European governments to hide their mounting deficits.
Stiglitz excoriates the financial markets’ attack on Greece in 2010 when, scenting blood, they shorted Greek bonds and used the new ‘weapons of financial mass destruction’ to mount their attack. He points out that the Papandreou government, elected in 2009 on a policy of openness and reform, was essentially shafted by the financial markets for its honesty.
What are we to conclude from all of this? The first thing is that austerity simply isn’t working. The manner in which it was imposed on Greece was not thought through. It emasculated economics of its moral purpose. It reflected an incoherent and arbitrary policy response by the rich and powerful to the global crisis economic crisis, at the expense of the weak. This is still happening.
The German narrative is simplistic and flawed. Its treatment of a new democratically mandated Greek government has been brutal and, from a macroeconomic perspective, calamitously wrong.
Greece will not find redemption in what has become of the eurozone. It should reject dependence. It should exit — after all, it gave us philosophy, reason, and democracy. It will rebuild and at less cost than that now imposed on it.
© Irish Examiner Ltd. All rights reserved