Greece and the Euro Zone Crisis - Thesis Example

Greece and the Euro Zone Crisis The Greek crisis is the best evidence of the failure of the capitalist model of governance. Karl Mark would have feltvindicated had he been alive today on the current state of affairs in Greece. Just to keep the corpse of capitalism, IMF and the EU have been trying to bail out Greece to avert an impending default forcing the people of Greece to suffer an extreme austerity policies as if county’s bankruptcy prospects are secondary to the ideology of capitalism. The international media orchestrated “debt crisis” for the past three years has been actually due to the existing ‘unfair and immoral’ capitalist system which is claimed to have triumphed over Marxist economics by the neoliberal and Keynesian economists. The ongoing crisis was triggered by Lehman brothers scandal in 2008 as one of the series of market economy failures since the Great Depression. The current failure in Greece can be witnessed on the streets of Athens occupied by homeless people and unemployed people holding two master’s degrees. Capitalists argue that Greece was a socialist state and hence the present state of affairs. On the contrary, the Greece has already embraced capitalism between 1990 -2007 when the both conservative and social democratic governments meekly signed the Treaties of Maastricht in 1992 and Lisbon in 2007. Capitalist overtones could be discerned from the country’s GDP which was 38,000,000,000 Euro in 1990 as against 208,000,000,000 euro in 2007 representing more than fivefold increase. In 1990, profits of Greek companies were 575,000,000 euro now increased to 16,000,000,000 euro by 2007 by 28 times. It is evident that while profits of the private sector have been enormous, increase in the daily basic wages of unskilled worker has been only 15 euro. For 20 years working class were contributing to the expansion of GDP and profit maximization of capitalists by 28 % in 17 years while salary at the lowest level increased by 1 %. It is clear therefore that while the period 1990-2007 has been a boon period of continuous profitability for the capitalists, income for the labour classes remains at the same level of 1980s. This is the price paid by the low and middle class for the Greece’s ambitious Olympic Games and Greece’s experiment with neoliberalism in 2000s. The irony is people still regard Greece’s EU accession a great achievement. It is not difficult to conclude that it is the elite class that has benefited and not the lower and middle classes. Just a year before Greece’s accession to EU in 1980, its trade balance against the rest of the world was 5,200,000,000 euro. In 28 years’ time it has reached 44,000,000,000 approximately. The country’s deficit of agricultural balance increased by 934 % during the period from 1980 to 2008. It increased by 74 % within two years of euro introduction in 2002-2003. Its foreign lending increased by 931 % from 1990 to 2000. Public debt for Greece in 1980 was 600,000,000 euro and it has increased in next 19 years to an unprecedented level of 298,000,000,000 euro by 497 times in 2009. Antagonists claim that Greece received community packages of 43,000,000,000 euro from 1981-2009 from Brussels as part of developmental programs and this has been the reason for the deficit. It is contrary to the actual position since the Greece’s imports during the last three decades were 379,000,000,000 euro as against its exports of only 125,400,000,000 euro which means that Greece has paid back six times the money received from Brussels. One may recall German economist Heiner Flassbeck’s words “Germany’s surplus is the deficit of her partners”. There is no denying the fact that corruption has been one of the reasons for Greek’s political failure in the past decades but it should not be forgotten that capitalist system alone has promoted corruption all these years. Further, it should be noted that the unelected Prime Ministers of Greece and Italy were formerly bankers who worked for multinational investment banks. After squandering the country’ resources, the troika of the Greek government, the IMF/EU block and Greek lenders are forcing the people to pay till the last drop of their blood. With no proper future plans, people of the country from low and middle class are asked to reconstruct the ruins of capitalism. People who are responsible for the crisis have turned the table against the people with the fake rhetoric “austerity or bankruptcy or neoliberalism or disaster”. It is extraordinary that Capitalism is failing where Philosophy and Democracy were born 2,500 years ago (Mottas, 2012). Colin Crouch (2011) wrote “non-death of neoliberalism and Paul Krugman (2010) “triumph of failed ideas” as reflections on the “strange combination of anti-neoliberal rhetoric” and “the stubbornness of those in power amidst chaos and disorientation”. It is argued that the ill-advised economic policy approaches are leading the Eurozone and the rest of the EU towards disaster. The European models of capitalism from 1990 until now for Greece are characterized by “a state-led Familialist welfare state. Under this model, Greece has been witnessed by “tensions between increase in female employment rate and familialist model. From state-led to liberal,shrinking core and enlarging periphery” during 1990s and2000s. Prior to crisis, the country did not benefit by any comparative advantage due to liberal reforms. There was limited de-familialisation as a result of low tax base. And after the crisis, the country has experienced collapse of socio-economic model with accelerated transition to liberal capitalism. The lack of comparative advantage still continues (Bosch, Lehndorff and Rubery,2009). The “varieties of capitalism” embraced by the European states can be truly called “varieties of vulnerability”. For Greece, Hungary and Spain vulnerability is in fact an understatement since foundations of economic and social development have been completely shattered in these countries. In tackling the 2008/2009 crisis, free-market fundamentalism is criticized while at the same time neoliberalism is advocated in spite of the strong public perception that “those who are responsible for the crisis should pay the bill’. (There is no alternative (TINA)). It is argued that victim of the public debt is being portrayed as guilty of public debt. Any slightest doubt in this regard is dispelled by the arguments of Leschke, Theodoropoulou and Watt in their essay on EU-level policy. The IMF researchers have conceded that short run fiscal consolidation results in contraction and not expansion aggravating unemployment and inequalities. Furthermore, the IMF authors contend that wherever there has been escalation in inequalities, there is a corresponding further deficit in the current accounts of the countries concerned discerned from their observation “ as income shares of the top 5 percent increased between the early 1980s and the end of the millennium, current account balances” (p18). Regardless of the current account balances worsening due to public debts or private debts, the latter have become public debts. They contend therefore there is no escaping the problem of income inequality problem in the long run. According to Hayek, the modern (welfare) state alone can achieve austerity since only such a welfare state can ‘put individuals under tutelage’. (Lehndorff, 2012). The sovereign debts crisis for Greece in 2009 has demolished its socio-economic model prevailed from 1994 to 2008 which period was characterized by high public indebtedness. The transition from the state-led familistic to a liberal and partially de-familialised capitalism has been the highlight of this period. This has been founded on the global financial crisis and EMU’s structural weakness. Things (sovereign debt crisis) would not have come to such a pass for Greece but for the global financial crisis and a different type of monetary union, notwithstanding the fact the Greek’s sovereign debt crisis is due to its internal structural causes. Furthermore, Greek growth model and financing of Greece were made possible only due to the European industrial and financial capital which however concealed the weaknesses in its socio-economic models. These are the main causes of failure of these models in the light of global financial melt-down. Both the IMF and the Eurozone countries rushed their huge loans to Greece in response to its sovereign debt crisis but in instalments with conditionalities of strict implementation of fiscal consolidation and ‘internal devaluation’. However, these conditions complied with by Greece from 2010 have resulted in continued recession causing erosion of Greek’s tax and productive bases. The debt sustainability has also been eroded. These have affected the livelihood of millions of people who have suffered unemployment and successive income loss. These outcomes of what is known as Economic Adjustment Programme (EAP) by stifling of public sector and a welfare state are the part of country’s forced transitioning to a liberal model of capitalism. Looking back, Greece which experienced sustained growth between 1994 and 2008 before stumbling upon global financial crisis in 2008 actually had been suffering from chronic and acute economic crisis in the 1980s and early 1990s. The country’s GDP grew by 3.7 % every year during 1994-2007 thus proving to be the fastest growing economy in the Eurozone only next to Ireland. Yet, the job creation was not adequate to accommodate new entrants to labour force and heavy immigrants during 1994-1999. As such, the unemployment rate which increased by 3.3 % between 1993 and 1999 came down from 12.1 % in 1999 to 7.7 % in 2008. The growth in GDP and private capital growth were driven by rising domestic demand and profitability. The rising wages, rents, profits, public spending, tax cuts, tax evasion and increased private borrowing actually had boosted domestic demand and consumption. Investment in public infrastructure prior to 2004 Athens Olympics and private residential investment also contributed to the boost in demand and consumption. Profitability, another driver for private capital accumulation also grew up equally. In 2007, the profitability was just 7 percent less than its average rate experienced during the ‘golden’ post-war period of Greek capitalism (1961-1973). Greece adjusted its macroeconomic policy during 1994-1999 in order to prepare ground for joining the European Monetary Union (EMU), putting in place restrictive fiscal and exchange rate policies and cuts in interest rate. These initiatives in 1987 resulted in decreased inflation, public-debt and debt-to-GDP ratio. But they led to erosion in competitiveness though fall in interest rates resulted in stimulation of productive investments. Upon joining the EMU on 1 January 2001, Greece took advantage of euro’s low interest rates. Real interest rates became even lesser because of Greece’s permanent inflation differential with the Euro region. In the first half of 2000s, Greek’s fiscal expansion crossed the 3 percent limit for public deficits in the EMU. The public deficit grew from 3.1 % to 7.5 of the GDP between 1999-2004. In spite of some efforts towards fiscal adjustment in 2005, the public deficit started growing to 6.4 % in 2007. The ratio of public debt to GDP also showed upward trend. The ratio was 96.3 % in 1994, 98.9 % in 2004 and 105.4 % in 2007. Falling interest rates and dropped real interest rates from 2001 onwards stimulated both public and private borrowing. Due to consumption, savings dropped from 20.4 % in 1994 to 7.1 % of GDP in 2008 while at the same time Greek household debt increased to 45.3 % of GDP in 2007 as a result Greek’s expansionary fiscal policy and low interest rates. Inflation was consistently above the Eurozone average of 1-1.5 % which blunted the competitiveness. Greece economy was the most agrarian in EEC till the end of 1980s and the second least tertiary economy only after Portugal. Public sector enterprises’ share in the GDP was the third highest in EEC after Portugal and Italy. Regulation of product market was one of the strongest of the OECD nations. The agricultural and non-agricultural sectors were characterised by micro and family enterprises. However, during 1990s and 2000s, agriculture lost importance and started declining and attraction was towards growth of tourism, construction, services and shipping. Many state-controlled banks and companies were privatised and there were deregulations in banking and public utilities. Though there had been resistance by the unions and public opinion towards privatisation, inflow of European capital caused these developments by mergers and acquisitions by multinational firms with domestic firms. These firms undertook public procurement contracts, participated in privatisations and made investments in retail, telecoms and hotels in keeping with rising demand for services. The above growth also contributed to feminisation of employment and entry of migrant labour who are the majority in manual workforce in Greece. The EAP is characterised by Washington directed neo-liberal project globally and IMF structural programmes in Third World Countries. The EAP’s objectives are fiscal consolidation to bring about surpluses in general government balance and stall the growth of sovereign debt. And also to achieve stability in banking system through liquidity guarantees facilitated by growing exposure of Greek banks to Greek sovereign bonds and internal devaluation to achieve reduction in fiscal deficits and enhance competitiveness. The neoliberal offensives have resulted in disrupted social cohesion, people’s lives and morale especially the most disadvantaged besides causing collapse of the economy and impending state default under still worse conditions that attracted financial rescue by the lenders. The EAP has been supervised for the past 18 months that has led to huge wage and pension cuts, excessive taxation of small and medium incomes and retrenchment of labour. Unemployment has risen from 9.5 % in 2009 to 16.3 % in 2011’s second quarter. It is continuing. Youth employment stands at 43 % while families are suffering income losses and are unable to save for their offspring. Social protection also has weakened with deterioration of standards in social goods and services. People are increasingly being pushed towards abject poverty and social exclusion. This shock therapy is actually killing the patient through creation of debt-trap and “spiral of austerity-recession-austerity”. Thus, the implementation of EAP programme in a full –fledged manner has put Greek economy in debt-trap and vicious circle of austerity, recession and intensified austerity (Karamessini, 2012).. Repeated adverse media reports on the financial status of Greece actually pushed the county to the brink of disaster. Foreign officials and executives gave unclear messages that only helped aggravate the adverse image perpetrated by the media. Rating agencies downgraded Greece. Moody’s rated A2, Fitch and S & P rated BBB+. Borrowing rates for Greece escalated enormously as a result. Country’s structural problems were characterized by increase of government spending by 87 % as against the increase in revenue of only 31%. In 2009, government spending was more than fifty percent of its GDP. There were overstaffing and low productivity in the public sector. Country’s wage rate increased by 5 % annually as against increase in exports of only 3.8 %. Greece’s ageing population (above 64) will rise to 32 % from the 2007 level of 19 %. Greek pension system requiring contribution for 35 years opposed to 40 years elsewhere is the most generous entailing additional burden on the exchequer. In the event of default by Greece, contagion will be felt in Southern European countries including “GIIPS”. It is alleged that successive Greek governments managed to conceal true level of debt by use of complex financial instruments with the connivance of leading financial institutions like Goldman Sachs. Greek government has been charged with taking up-front payment from investors in exchange of inflated revenues of its highways, airports and lotteries. Furthermore, the Greek government is accused of having borrowed billions by trading of its currency at favourable exchange rates disguised as currency swaps that do not come under the net of EU accounting rules. Greece’s state of affairs has exposed the mismatch between the EU’s advanced status of its monetary union and its political union which is incomplete. Even within the tightly integrated economic union, the single monetary policy of Euro zone has to contend with 16 separate national fiscal policies (Impact of Greece Crisis, 2012). The EU action for a loan package of 80 billion euros & IMF for 30 billion euros to Greece announced in May 2010 to be disbursed during the next three years only serve as lifeline to Gernan and French banks having exposure to Greece to the extent of US $ 34 billion and $ 56.7 billion respectively. These loans if not paid would result in default by Greece on loans of over 200 billion euros from these banks. As such, the bailout package was with a view to pay back the banks, institutional investors such as pension funds and insurance company which held Greek debt. Thus, the first bailout package was convert privately held debt in to publicly held debt. Eurozone was once described by William Hague as a ‘burning building with no exits’ in the event of sovereign debt crisis. Countries. outside the Eurozone such as the U.K. and the U.S could resort to devaluation and adjust their balance of trade by virtue of having their own currencies unlike the Eurozone countries such as Greece without their individual currencies. This why Hague described as ‘no exits in case of fire’. The agencies of European Financial Stability Mechanism set up in February 2011 and the European Financial Stability Facility (EFSF) set up earlier with a mandate to provide jointly up to 500 billion Euros as emergency funds. Euros. European Central Bank (ECB) again facilitated conversion private debt into public debt by agreeing to buy government bonds of Italy and Spain when they found it difficult to rollover their loans with higher interest rates. Since these still proved to be insufficient, again in October, the EFSF was more than doubled to 1 trillion Euros. Second bailout package was announced for Greece in February 2012 since the above measures were not adequate. In spite of the first bailout package, Greece economy shrank by 16 % and the year 2011 proved to be the fifth year of recession for Greece, the longest ever period of recession for any country of Europe since the World War II. There was negative growth of -7 % in the year 2011 for Greece. This has cost Greece people heavily as could be inferred from the 21 % unemployment , 48 % unemployment among young people and 25 % homelessness. The homelessness has been there for the third year in succession with thousands of people sleeping on the streets. 28 % of Greeks are poverty-stricken, and experiencing social exclusion as a result. Suicide rates increased in the country of Greece which had once the lowest rate of suicide. Average 5000 calls to the Athens Suicide hotlines in 2010 doubled in the next year 2011. 150,000 business establishments have closed and rate of emigration has been the highest in 50 years. The Greece agreed to sack 150,000 workers in the public sector by 2015 and a 22 % cut in wages and 12 % in pension payments of more than 1300 Euros every month. The current level of Greece’s debt i.e 160 % of its GDP is targeted to be reduced to 120.5 % by 2020 through these sustained measures. But people of Greece have to go through another eight years of austerity. Greek will receive 130 billion Euros and have its 107 billion Euros written off in the process, again an attempt to benefit private interests at the cost of public. It is argued Greece could pretty well choose to default as Latin American countries such as Argentina, Ecuador, Uruguay, Paraguay and the Dominican Republic who defaulted in the last decade have shown better annual growth as also Indonesia, Pakistan and Russia. It is argued that Greece exiting EU in the event of a default would only mean few years of suffering for its people on re-establishment of its own currency Drachma rather than eight of austerity measures as above with no guarantee however. For example, consequent to default, Argentina’s economy suffered 11 % fall in the first year but started recovering in the second year onwards. Default would be better option for Greece since it can devalue its currency and become more competitive by regaining control of its monetary and fiscal policy with a view create more job and regenerate economy. It should be noted that the second bailout efforts is not rescue Greece economy but to save the banks and Eurozone. President of the Athens Chamber of Commerce has stated “ The funds that are coming in are not staying Greece, are not invested in Greece, are not here help Greeks out of this crisis. It is simply to repay the banks, so they can retain the balance sheets on the profits side. The second objective for the bailout is to buy time for Eurozone with the Eurozone ministers being fully aware of the inadequacy of the bailout of 170 Euros as against an estimated 245 billion Euros which are however impossible to raise. As such, the bailout will not save Greece. German press has conceded “ a bankrupt country has been saved – for now”. and expressed doubts if the bailout would deliver the economic performance projected. The French press says that bailout is “far from resolving the problems of Greece”. Italian press “ the Europe of cold accountants and meticulous lawyers, incapable of seeing beyond even very modest figures and percentages, can ensure the success of Greece’s new bailout. The real risks for the survival of Euro come from these false masters”. They have imposed a false solution on Greece that would shrink their economy rather than grow. It has been predicted that economy would fall by 25 % which is close to 29 % the U.S. experienced during the Great Depression. The latest bailout calls for leadership of the Left and reassertion of democracy and sovereignty of Greek people that are at stake as a result of the bailout (Sutton, 2012). Jessop (2012) argues that Eurozone crisis is due to varieties of capitalism (VoC) operating within and lists four problems associated with VoC approach. Local, regional, national, or more comprehensive models such as Confucian capitalism compete on same levels for same objectives. VoC falsely assumes that different form can co-exist isolated from each other. It does not recognize long-term global dynamics in the world market. The approach views all varieties as equal and if one of these is found to be more productive or progressive, it could be copied or imposed on others. (Macartney, 2011) adds that series of short, medium and long-term measures caused worst global financial instability since 1929 mainly because of excessive leveraging in U.S. sub-prime currencies, low interest rates that caused housing bubbles, off balance-sheet ventures etc. The solutions resulted in bailout packages for restoration of liquidity and stimulate global credit markets and industry. As of 2008, the collective figures for Western Europe, China and the U.S. stood at $ 3000 billion. This is in effect giving more credit to finance bad debts. But all boil down on the taxpayer through wage or welfare spending cuts and unemployment. At the same time, former CEO of Lehman Brothers safeguarded his $ 480 m personal remuneration prior to the bank collapse so also Sir Fred Goodwin of the Royal Bank of Scotland and so many other CEOs. Jessop (2012) is of the view that eastward expansion intensified the incoherence of EU brought about by neoliberal forces within EU and outside and that the Eurozone crisis is the manifestation of “latent incompossible variegation of EU and its partners in EEA as these economies are inserted into world market as a whole” (p 15). Revisiting the Eurozone crisis, (Jessop, 2012) unlike crisis of competitiveness in individual economies and Minsky-induced recession which can be addressed by crisis-management responses, is characterized by design flaws that prevent application of the routine responses. Design flaws are likened to Breton Woods System wherein devaluation is not possible. Besides, although Eurozone has the lender of last resort, there is no Government banker such as Bank of England or Federal Reserve to purchase government debt. This was purposefully done in order to reduce State role and have the market discipline member-states. Though ECB can act as the lender of last resort, it can act on the lines of a Government banker. Rigidities of EU and Eurozone along with strong interdependencies account for “pathologically strong variegation, impossible choices” that threaten to render EU an incompossible dream. Greece that has incurred huge debt with no chance of repaying could harm all European banks and pension funds that have granted loans to it and it could cause wider bank panic. The need of the hour is a financial firewall by stopping the contagion by backstopping other PIIGS (Portugal, Italy, Ireland, Greece and Spain). Congressional Research Report (Nelson, Belkin, & Mix, 2011) states that Greece crisis is continued interest for the U.S. since along with the E.U., it has the largest economic and financial stakes around the world. The report has the other side of the story that would appear to refute the blame on capitalism. Rather than the problem of Greece of recent origin, the report says that Greece has perennial history public debt ever since it obtained independence from Ottoman Empire in 1832. Greek economy and society have deep rooted characteristics responsible for lack of sustained economic growth that underlie the current crisis. Main features are all pervasive state control of the economy, an unwieldy and sloppy public administration, widespread tax evasion, and political clientelism. As if these were not enough, foreign capital at low rates during the 2000s and global financial crisis of 2008-2009 aggravated the weakness of the economy with strained public finances to an unsustainable level. To elaborate, Greece government had controlled 75 % of business assets and other sectors until 1990s. By 2008, it reduced the state’s stake to 50 % by 2008 though according to the OECD private sector still reels under complex regulations. Public sector wages and social benefits consumed significant portion (75%) of the rising government expenditures which accounted for 50 % of the country’s GDP according to a 2009 survey. Greece has the highest wages rates for its public sector, among the OECD members but the quantity and quality of its services are not equally superior. Greek politicians have pampered public sector labor force only to get electoral support. Public sector unions have also taken undue advantages to get generous wages and pension benefits. Clientelism is attributed to tax evasion and numerous tax codes for tax exemptions. It is claimed that until the beginning of debt crisis, Government had taxed only one third of the officially declared income with an average tax rate of 30 %. The unrecorded income accounts for more than 30 % of the official GDP. After adoption of Euro, cost of the country’s borrowings dropped by 18 % from 24.5 % to 6.5 % during the period between 1993 and 1999. The ECB’s rules of stability and growth required the government deficit to pegged down below 3.% of GDP. And public debt levels up to 60 % of GDP as otherwise it could attract fines up to 0.5 % of GDP. These features instilled confidence in investors and other Eurozone member states. Yet the influx of capital did not improve the fundamentals but was used for government spending and concealed the effect of low tax revenue. Borrowings were made to pay for imports without ensuring corresponding export revenues. Instead of utilizing the capital inflow for capital expenditure and creating new sources to repay existing debts, funds were utilized for current consumption without corresponding revenue generation for repayment of existing debt. Fines were imposed by ECB in 30 cases of violations of Stability and Growth Pact involving member states including Greece and not financial sanctions against violations. Though a small state accounting for only 2.4 % of total GDP of Eurozone, implications of crisis are “far reaching” confirming the fears expressed by economists upon the creation of Eurozone. The stability and Growth Pact is still in force and will continue to be framework for fiscal policy within Eurozone until 2020 as informed by the European Commission who has required all the member states to bring down the deficits below 3 % of the GDP. However, Hans Boeckler Foundation economists contend that it is absurd to impose this condition to be achieved within a short period since current account deficit or surplus would only diminish gradually unlike public sector borrowings which would fall very rapidly. Refusal by Germany and other surplus countries to allow correction of imbalances at their cost has been the stumbling block for a practical solution. It is argued that although EU financial integration in response to globalization is rational, the manner in which it has been carried out is not. The European leadership has tried to copy the U.S. model without taking into account of the pressures of the social institutions on the financial processes. It is further argued that in a blind rush to reduce transaction costs, social protection and consumer standards have been given go-by (Grahl, 2011). The E.U. is devoid of social and institutional bodies to address the current crisis and forces of stagnation at work. Solutions could only come from an unlikely prospect of “Schumpeterian innovations or external markets. There is no prospect of exports to the U.S. as before since U.S. itself is making all out efforts to make its own exports with its households remaining in debt deflation mode (Bellofiore, Gariboldo, & Halevi). Angela Merkel had warned as early as in 2009 that no miracle of even the boldest political decision could resurrect the European economy. It is still valid in the fifth year of the crisis since 17 out of 27 members of the E.U. are in crisis. For the hardest hit countries, it may take a generation to restore pre-crisis levels by which the EU itself might disintegrate (Prawna, 2012) .Roos (2012) concurs with Adam Smith who once said that “an invisible hand” guides economic activity in the free market though it was refuted by Joseph Stiglitz who said the hand is invisible because there is no hand as such. Roos argues that the invisible hand not only regulates economic activity but also influences the political process. Read More