Publishers Note: On 3 June 2015 Peter Thomas gave a talk at the Group of 17 hosted by Dan O’Neill’ called “Cracks in the Fortress? Project Europe and Prospects for the Left”. Here are some afterthoughts by John Ransley that may be of interest to the people who attended or, like me, missed the talk. Ian Curr, June 2015].
STOP PRESS *** STOP PRESS *** STOP PRESS *** STOP PRESS
Here is an updated version of John Ransley’s response that, in the light of the July 5 referendum proved to be a pretty accurate version of Syrizia’s demands
Please note I have taken care to convert the PDF into a text version below but take full responsibility for any typos that may have occurred. Contributors please note, that unformatted text submissions are a lot easier for me to faithfully render on these pages. My days are long enough already.
7 July 2015
Greek Crisis: Peter Thomas Talk 3 June 2015
Thanks for hosting Peter Thomas’ fascinating talk on ‘”Cracks in the Fortress? Project Europe and Prospects for the Left”. A few afterthoughts may be of interest to the people who attended.
The dominating European political-economic context is the austerity policy imposed on eurozone countries by the so-called Troika of lenders—the European Commission, the European Central Bank and the US-based IMF (EU-ECB-IMF)—in response to the 2008 GFC. The doctrine of ‘expansionary austerity’ claims that slashing government spending (reducing government deficits) has such positive effects on business and consumer confidence that this outweighs its inevitable contractionary effects on the economy. The NeoKeynesian criticism that crushing a country’s depressed economy actually makes it harder to repay debt has been borne out in practice. In fact the main effect of austerity in the eurozone has been to cause unprecedented levels of unemployment, currently 25-26 percent in Greece and Spain, the two countries that got the most attention in Peter’s talk. In April 2015 Eurostat estimates unemployment at 23.5 million men and women in the EU28 (28 member states), of whom 17.9 million were in the EA19 (euro monetary area, 19 states).
In the part of his talk addressed to the Greek crisis, Peter argued the Syriza government had only two options: (1) accept the Troika demands; or (2) lead Greece out of the Eurozone.
The former as he noted would be political suicide. The latter he said could be the beginning of Europeanization from below—as opposed to the top-down model that has created the current union. Peter also stressed the troika is very keen to ensure the failure of the Syriza model as a viable solution to the EU crisis, in order to head off electoral success by the anti- austerity Podemos party in the November 2015 Spanish elections.
Peter highlighted that Syriza (together with Spain’s Podemos), is an inheritor of 1970s eurocommunism, particularly that version of it articulated by the Greek-French Structural Marxist Nicos Poulantzas. Consistent with this leftist perspective, Syriza had made commendable moves towards legalising north African refugees.
I will make some points about Peter’s argument below. But first a little potted history to provide context, starting with some juicy extracts from a Michael Lewis article.
Michael Lewis: Beware Greeks Baring Bonds
For most of the 1980s and 1990s, Greek interest rates had run a full 10 percent higher than German ones, as Greeks were regarded as far less likely to repay a loan. There was no consumer credit in Greece: Greeks didn’t have credit cards. Greeks didn’t usually have mortgage loans either.
In 2001, Greece entered the European Monetary Union, swapped the drachma for the euro, and acquired for its debt an implicit European (read German) guarantee. Greeks could now borrow long-term funds at roughly the same rate as Germans—not 18 percent but 5 percent. To remain in the euro zone, they were meant, in theory, to maintain budget deficits below 3 percent of GDP; in practice, all they had to do was cook the books to show that they were hitting the targets. Enter, in 2001, Wall Street’s Goldman Sachs, which—for a very large fee—engaged in a series of apparently legal but nonetheless repellent deals designed to hide the Greek government’s true level of indebtedness. The machine that enabled Greece to borrow and spend at will was analogous to the machine created to launder the credit of the American subprime borrower—and the role of the American investment banker in the machine was the same.
Between 2002 and 2007 a tsunami of cheap credit rolled across the planet. The credit wasn’t just money, it was temptation. It offered entire societies the chance to reveal aspects of their characters they could not normally afford to indulge. Entire countries were told, “The lights are out, you can do whatever you want to do and no one will ever know.” What they wanted to do with money in the dark varied. Americans wanted to own homes far larger than they could afford, and to allow the strong to exploit the weak. Icelanders wanted to stop fishing and become investment bankers, and to allow their alpha males to reveal a heretofore suppressed megalomania. The Germans wanted to be even more German; the Irish wanted to stop being Irish. No response was as peculiar as the Greeks’, however: what the Greeks wanted to do, once the lights went out and they were alone in the dark with a pile of borrowed money, was turn their government into a piñata stuffed with fantastic sums and give as many citizens as possible a whack at it. In just the past decade the wage bill of the Greek public sector has doubled, in real terms—and that number doesn’t take into account
the bribes collected by public officials. The average government job pays almost three times the average private-sector job …. [a list follows].
Oddly enough, the financiers in Greece remain more or less beyond reproach. They never ceased to be anything but sleepy old commercial bankers. Virtually alone among Europe’s bankers, they did not buy US subprime-backed bonds, or leverage themselves to the hilt, or pay themselves huge sums of money. The biggest problem the banks had was that they had lent roughly 30 billion euros to the Greek government—where it was stolen or squandered. In Greece the banks didn’t sink the country. The country sank the banks.
[The party finally came to an end with the overthrow of the right wing Karamanlis government in October 2009. The decisive factor was the Vatopaidi scandal. Michael Lewis continues:]
Dimitri Contominas, the billionaire creator of a Greek life-insurance company and, as it happens, owner of the TV station that broke the Vatopaidi scandal, put it to me bluntly: “The Vatopaidi monks brought George Papandreou to power.”
After the new party (the supposedly socialist Pasok) replaced the old party (the supposedly conservative New Democracy), it found so much less money in the government’s coffers than it had expected that it decided it had no choice but to come clean. The prime minister announced that Greece’s budget deficits had been badly understated—and that it was going to take some time to nail down the numbers. Pension funds and global bond funds and other sorts who buy Greek bonds, having seen several big American and British banks go belly-up, and knowing the fragile state of a lot of European banks, panicked. The new, higher interest rates Greece was forced to pay left the country—which needed to borrow vast sums to fund its operations—more or less bankrupt. In came the IMF to examine the Greek books more closely; out went whatever tiny shred of credibility the Greeks had left. “How in the hell is it possible for a member of the euro area to say the deficit was 3 percent of GDP when it was really 15 percent?” a senior IMF official asks. “How could you possibly do something like that?”
Michael Lewis, Vanity Fair, October 2010
Bloomberg: Who Benefits?
Let’s begin with the observation that irresponsible borrowers can’t exist without irresponsible lenders. Germany’s banks were Greece’s enablers. Thanks partly to lax regulation, German banks built up precarious exposures to Europe’s peripheral countries in the years before the crisis. By December 2009, according to the Bank for International Settlements, German banks had amassed claims of €556bn ($704 billion) on Greece, Ireland, Italy, Portugal and Spain, much more than the German banks’ aggregate capital. In other words, they lent more than they could afford.
When the EU and the ECB stepped in to bail out the struggling countries, they made it possible for German banks to bring their money home. As a result, they bailed out Germany’s banks as well as the taxpayers who might otherwise have had to support those banks if the loans weren’t repaid. Unlike much of the aid provided to Greece, the support to Germany’s banks happened automatically, as a function of the currency union’s structure.
It’s hard to quantify exactly how much Germany has benefited from its European bailout. One indicator would be the amount German banks pulled out of other euro-area countries since the crisis began. According to the BIS, they yanked €279bn ($353 billion) from December 2009 to the end of 2011 (the latest data available). Another would be the increase in the Bundesbank’s claims on other euro-area central banks. That amounts to €466bn ($590 billion) from December 2009 through April 2012, though it would also reflect non-German depositors moving their money into German banks.
By comparison, Greece has received a total of about €340bn in official loans to recapitalize its banks, replace fleeing capital, restructure its debts and help its government make ends meet. Only about €15bn of that has come directly from Germany. The rest is all from the ECB, the EU and the International Monetary Fund.
Currency devaluation not an option
Devaluation of your currency is the macroeconomics standard crisis-fighting tool when a country goes into recession. Instead of going through the protracted pain of cutting wages you just devalue your currency — reduce its value in terms of other currencies — and you effect a de facto wage cut.
But this is not an option when your country is part of a currency union, as Greece is.
ICELAND’s post GFC recovery shows how having your own currency works. Paul Krugman: “Iceland’s bankers had run up foreign debts that were many times its national income.
Unlike Ireland, which tried to salvage its banks by guaranteeing their debts, the Icelandic government forced its banks’ foreign creditors to take losses, thereby limiting its debt burden. And by letting its banks default, the country took a lot of foreign debt off its national books.
At the same time, Iceland took advantage of the fact that it had not joined the euro and still had its own currency. It soon became more competitive by letting its currency drop sharply against other currencies, including the euro. Iceland’s wages and prices quickly fell about 40 percent relative to those of its trading partners, sparking a rise in exports and fall in imports that helped offset the blow from the banking collapse.
The combination of default and devaluation has helped Iceland limit the damage from its banking disaster. In fact, in terms of employment and output, Iceland has done somewhat better than Ireland and much better than the Baltic nations.”
Long article by Paul Krugman: 16Jan2011
Election of Syriza Government 25Jan15
At the Greek election on 25 January 2015 the left-wing party SYRIZA won 149 out of the 300 seats, 2 short of an absolute majority. Alexis Tsipras was sworn in as Prime Minister of Greece on 26 January 2015, after reaching a coalition agreement with ANEL, a right wing conservative anti-austerity party that won 13 seats. The neo-fascist Golden Dawn party was reduced by one seat to 17, following the arrest of some of its MPs to face trial on suspicion of forming a criminal organization. http://en.wikipedia.org/wiki/Greek_legislative_election,_2015
Back to Peter’s talk
- Greek voters reject the two options described by Peter.
75% want to stay in the A poll reported 30April15 after a television interview of PM Alexis Tsipras showed the vast majority of Greeks want to stay in the euro zone and are against snap elections, while half of them worry that Greece may leave the euro. http://greece.greekreporter.com/2015/04/30/poll-shows-75-of-greeks-want-to-stay-in-euro- zone/
- In fact there is and has always been since the election of the Syriza government, a third option, one that is more likely to get up than either of Peter’s two. This is the proposal being advanced by the Syriza government and explicitly endorsed by Paul Krugman, economics columnist for the New York Times. Nobel prize-winner Krugman is perhaps the world’s leading public NeoKeynesian economist, so despite Syriza being eurocommunist, its reform proposal can be regarded as NeoKeynesian.
- Paul Krugman’s blog is the most widely read economics blog in the English speaking world. Other top flight NeoKeynesian economists who write for the public are Brad DeLong, Simon Wren-Lewis, Nouriel Roubini, Joseph Stiglitz and not least, Queensland’s own John Quiggin. Robert Skidelsky, author of a major award-winning biography of British economist John Maynard Keynes, also falls into this camp. As far as I can ascertain, they would all support the approach taken by the Syriza government.
NeoKeynesian economics is mainstream economics, although generally opposed by the political right. Krugman describes himself as “depressingly mainstream”. The following extracts are taken from his running commentary on the Greek crisis.
Greek Debt is an accounting fiction: 26Jan15 blog:
“Most discussion is framed in terms of what happens to the debt. But at this point Greek debt, measured as a ‘stock’, is not a very meaningful number. After all, the great bulk of the debt is now ‘officially’ held, the interest rate bears little relationship to market prices, and the interest payments come in part out of funds lent by the creditors. In a sense the debt is an accounting fiction; it’s whatever the governments trying to dictate terms to Greece decide to say it is.”
Greek primary surplus: 26Jan15 blog:
“Greece’s primary surplus is the difference between what it takes in via taxes and what it spends on things other than interest. This surplus — which is a flow, not a stock — represents the amount Greece is actually paying, in the form of real resources, to its creditors, as opposed to borrowing funds to pay interest. Greece has been running a primary surplus— an excess of revenue over spending not including interest—since 2013, and according to its agreements with the troika it’s supposed to run a surplus of 4.5 percent of GDP for many years to come. What would it mean to relax that target? … Keep your eyes on that ball.” http://krugman.blogs.nytimes.com/2015/02/02/whos-unreasonable-now/
Greece should keep most of its primary surplus, not pay it to creditors: 2Feb15 blog:
“Yanis Varoufakis is saying that he and his colleagues don’t care what happens to the headline value of the debt — if you want to claim that there has been no write-off, OK. What they want instead is substantive but not outrageous relief from the burden of running primary surpluses, reducing the amount of resources transferred to creditors from 4.5 to 1-1.5 percent of GDP; they also want flexibility to achieve these surpluses with a mix that includes more revenue and less spending austerity. This is a dastardly ploy by those left-wing radicals. You see, it’s completely reasonable. The key point is to grant Greece some relaxation — but not elimination — of the requirement that it run large primary surpluses, thereby creating room for recovery. And that’s what Greece is now asking for.” http://krugman.blogs.nytimes.com/2015/02/02/whos-unreasonable-now/
Pandering to German voters: Krugman column 6Feb15
“Germany is demanding that Greece keep trying to pay its debts in full by imposing incredibly harsh austerity. The implied threat if Greece refuses is that the central bank will cut off the support it gives to Greek banks. And that would wreak havoc with Greece’s already terrible economy. Yet pulling the plug on Greece would pose enormous risks, not just to Europe’s economy, but to the whole European project, the 60-year effort to build peace and democracy through shared prosperity.
Like all too many crises, the new Greek crisis stems, ultimately, from political pandering. It’s the kind of thing that happens when politicians tell voters what they want to hear, make promises that can’t be fulfilled, and then can’t bring themselves to face reality and make the hard choices they’ve been pretending can be avoided. I am, of course, talking about Angela Merkel, the German chancellor, and her colleagues.
Unfortunately, German politicians have never explained the math to their constituents. Instead, they’ve taken the lazy path: moralizing about the irresponsibility of borrowers, declaring that debts must and will be paid in full, playing into stereotypes about shiftless southern Europeans. And now that the Greek electorate has finally declared that it can take no more, German officials just keep repeating the same old lines.
Maybe the Germans imagine that they can replay the events of 2010, when the central bank coerced Ireland into accepting an austerity program by threatening to cut off its banking system. But that’s unlikely to work against a government that has seen the damage wrought by austerity, and was elected on a promise to reverse that damage.” http://www.nytimes.com/2015/02/06/opinion/a-game-of-chicken.html
Troika demand would cut Greek GDP by 8%: Krugman column 16Feb15:
“You can argue that Greece brought its problems on itself, although it had a lot of help from irresponsible lenders. At this point, however, the simple fact is that Greece cannot pay its debts in full. Austerity has devastated its economy as thoroughly as military defeat devastated Germany after WWI— real Greek GDP per capita fell 26 percent from 2007 to 2013, compared with a German decline of 29 percent from 1913 to 1919.
Despite this catastrophe, Greece is making payments to its creditors and running a primary surplus of around 1.5 percent of GDP. And the new Greek government is willing to keep running that surplus. What it is not willing to do is meet creditor demands that it triple the surplus [to 4.5%], and keep running huge surpluses for many years to come.
What would happen if Greece were to try to generate those huge surpluses? It would have to further slash government spending — but that wouldn’t be the end of the story. Spending cuts have already driven Greece into a deep depression, and further cuts would make that depression deeper. Falling incomes would, however, mean falling tax receipts, so that the deficit would decline by much less than the initial reduction in spending — probably less than half as much. To meet its target, then, Greece would have to do another round of cuts, and then another. Furthermore, a shrinking economy would lead to falling private spending too — another, indirect cost of the austerity.
Put it all together, and attempting to cough up the extra 3 percent of GDP the creditors are demanding would cost Greece not 3 percent, but something like 8 percent of GDP. And remember, this would come on top of one of the worst economic slumps in history.” http://www.nytimes.com/2015/02/16/opinion/paul-krugman-weimar-on-the-aegean.html
“Absurd” troika demand intended to force Grexit: Paul Krugman Blog: 16Feb15
“OK, this is amazing, and not in a good way. Greek talks with finance ministers have broken up over [the Eurogroup] draft statement, which the Greeks have described as “absurd.”
[Draft statement] translation: no give whatsoever on the primary surplus of 4.5 percent of GDP.
There was absolutely no way Tsipras and company could sign on to such a statement, which makes you wonder what the Eurogroup ministers think they’re doing. I guess it’s possible that they’re just fools — that they don’t understand that Greece 2015 is not Ireland 2010, and that this kind of bullying won’t work. Alternatively, and I guess more likely, they’ve decided to push Greece over the edge. Rather than give any ground, they prefer to see Greece forced into default and probably out of the euro, with the presumed economic wreckage as an object lesson to anyone else thinking of asking for relief. “ http://krugman.blogs.nytimes.com/2015/02/16/athenae-delenda-est/
Primary surplus disappearing act: 30May15 blog:
“There is, one must admit, a new problem caused by the current confrontation itself: uncertainty has pushed Greece back into recession, and the primary surplus achieved last year has vanished. But given a deal it should be possible to arrange some temporary financing while a modest recovery puts the primary balance back into the black.” http://krugman.blogs.nytimes.com/2015/05/30/last-exit-before-chaos/
Greece can’t pay all of the interest on its debt: Krugman column 1June15:
“Greece can’t and won’t pay all of the interest coming due on its existing debt, let alone pay back its debt, because that would require a crippling new round of austerity that would inflict severe economic damage and would be politically impossible in any case. So we know what the outcome of a successful negotiation would be: Greece would be obliged to run a positive but small “primary surplus,” that is, an excess of revenue over spending not including interest. Everything else should be about framing and packaging.” http://www.nytimes.com/2015/06/01/opinion/paul-krugman-that-1914-feeling.html
Greek debt will never be repaid in full
Everyone knows this. You can’t suck blood out of a stone.
The last Greek loan repayment of €750m to the IMF on 12 May was paid with an IMF loan: http://www.nytimes.com/2015/05/13/business/international/vicious-debt-cycle- haunts-greece.html
On Wednesday 3 June Greek PM Tsipras presented the troika with a 47-page list of proposed But the creditors put forward a rival plan hammered out without Greece at a meeting in Berlin on Monday 1 June attended by the leaders of Germany and France.
It was a demand for even more austerity, anathema to a party catapulted into office on the promise of terminating austerity. The ultimatum demanded spending cuts and tax increases worth 2% of the country’s GDP in the form of pension and VAT reform as the price for €7.2bn in fresh financial help. Particularly offensive to Syriza was an “11 percent tax on medicine and 23 percent tax on energy”. In effect the troika was still demanding an increase in the Greek primary surplus to 4.5 percent and that all of the surplus should go towards paying down Greece’s debt. http://www.theguardian.com/business/2015/jun/04/greece-delays-300m-payment-to-imf
On Friday 5 June the Syriza government shocked the IMF by deferring a loan repayment of €300m due that day, instead telling the IMF it will bundle together all €1.6bn of debt payments due and settle up on 30 June.
Greece’s finance minister, Yanis Varoufakis, told Sky News: “Objectively speaking, we have until the 30 June because this is when the extension of the agreement with our creditors expires.” http://www.theguardian.com/business/2015/jun/04/greece-delays-300m-payment-to-imf
Forget about the debt number and focus on the primary surplus.
What do the troika want? They want to increase the Greek primary surplus to 4.5 percent by imposing even more severe austerity, and take this surplus to pay off debt or at least interest on For this they are offering €7.2bn in fresh financial help, which would mostly be used to maintain the round robin of scheduled debt repayments to creditors. Their big stick is forcing Greece out of the eurozone, which they know would be deeply unpopular with Greek voters, besides causing massive economic damage. According to Paul Krugman, the effect of their demands if accepted would cut Greek GDP by 8 percent.
What does Syriza want? They want substantive but not outrageous relief from the burden of running primary surpluses, reducing the amount of resources transferred to creditors from5 to 1-1.5 percent of GDP; they also want flexibility to achieve these surpluses with a mix that includes more revenue and less spending austerity.
John Ransley 9 June 2015
“Primary Surplus” explained:
Why Greece needs to default within the Eurozone: Yanis Varoufakis 16May12 http://yanisvaroufakis.eu/2012/05/16/weisbrot-and-krugman-are-wrong-greece-cannot-pull- off-an-argentina/
Roger Cohen’s columns in the New York Times are always interesting for an American ‘liberal’ point of view. But his latest column, “The Greek Trap”, shows he has swallowed the troika line whole. On this occasion his commenters have the better of it, although not written with the same flair and clarity Cohen is known for. But clarity and flair do not cut it when you’re wrong. Here is one comment, from Joel (Branford, CT):
Dear Mr Cohen, It is not true that the Greeks desperately need those 8 billions. Now that they are in primary surplus (or at least were a few months ago, and would be again if the situation clarifies), the only reason they need these 8 billions is to be not officially considered defaulting. If the 8 billions are paid by the FMI and EU, they won’t go to Greece, they will go directly to Greeks’ creditors, ie basically the same FMI and EU, together with whatever primary surplus Greece can make. As several readers have already said, you should read the columns of your colleague Krugman on this.
Cohen’s column (and comments) is here: