Greece, Austerity and the European Monetary Union


In the next couple of weeks, Greece will elect a new government and according to the polls, the emerging Syriza party could form that government.  They are calling for an end to austerity measures and their Marxist Communist roots are causing quite a bit of concern in the wider Europe.  Greece, austerity and the European Monetary Union are a heady mix!

But regardless of who wins this election, Greece faces substantial problems. Among them, a huge, and growing, public debt.

Craig Barfoot spoke to Greek economist Dr Yiannis Kitromilides, an Associate Member of the Cambridge Centre for Economic and Public Policy, Department of Land Economy, University of Cambridge, about the current situation and the position of Greece within the European Monetary Union (EMU).

He started by asking Dr Kitromilides  to comment on the repeated narrative that high public spending and widespread tax evasion, combined with the credit crunch, were the causes of Greece’s problems.

Yiannis Kitromilides:  This narrative is correct.  There was widespread tax evasion, and avoidance. There is tax avoidance in most countries, but there was tax evasion on a large scale in Greece; there was corruption; an overblown public sector (politicians were creating jobs in the public sector and employing their supporters, even in key positions).

Craig Barfoot:  so where are we now?

YK: The current economic situation in Greece is best compared to the economic situation in the US in the 1930s.  Since 2009 the economy has lost 25% of its output, they are 25% poorer, unemployment is 25%, youth unemployment is about 60% and the prospects of growth are – as in the wider Eurozone – quite bleak.  And yet the debt, the original form of the problem, is increasing.

So, after five years of sacrificing all this output the prospects are bleak.

CB: When we talk about austerity measures specifically for Greece, what was implemented?

YK: Austerity measures are those measure imposed in order to produce a balance in the annual budget.  The reason you owe money is that you are spending more than you’re earning, so if you are an individual who wants to avoid insolvency the only way to get out of it is to cut down on your spending and increase your income.

If you apply this to governments, it means cutting government spending and increasing taxes, as in Greece.

CB:  That sounds reasonable….

YK: But this is a process that many economists believe to be counterproductive. If you are trying to pay your debts as a country, you must not look at the solution for an individual family.  It is what the economists call the ‘fallacy of composition’ – what is true for the part is not always true for the whole.

This is something that has a long history in economic thought going back to the 1930s, when Keynes argued along similar lines about what needed to be done to deal with the 1930s depression in the UK and USA.  That if you are in a bad situation economicallhy, the solution is not to act in the same way as a family in economic difficulties (ie to impose austerity), but rather to do the opposite.

It sounds paradoxical and counter intuitive, but some people say this is what needed to be done, not only in Greece but also in other indebted economies.  By trying to solve the problem of indebtedness by austerity, you are making the problem worse.

CB:  Who does Greece owe its debt to?

YK: Not to the European banks, though they were the original lenders, but rather to international institutions like the International Monetary Fund (IMF) and the European Central Bank (ECB) – which means Greece owes money to the other members of the Monetary Union.

Syriza is asking them to cut the debt by 50% – to forgive 50%.  The other 50% they say they will repay as soon as Greece achieves sustainable growth of 3-4%.  They says this was exactly what was done for the German debt in 1953 – it is what the allies agreed – to give Germany more time to repay, having also been forgiven 50%.

Is this a realistic prospect?  Probably not.  But what is the alternative?  How is Greece going to repay the £320bn euros they owe, 177% of GDP, even if Syriza doesn’t get elected?  If another coalition gets in, what is the prospect of Greece repaying all that money which is, by common agreement amongst most economists, not sustainable?  How is it going to be achieved  – by a growth rate that has not been achieved before, and in a climate of austerity?

CB: I was looking at the credentials of Syriza and their communist/Marxist background.  It must be making the Standing Order worried that they might actually get elected….

YK: Well, yes, but it isn’t necessarily a good thing.  They may wish to make an example of Greece, as they did with Cyprus.

CB: What do you mean?

YK: They may say they will kick out Greece, because if Syriza succeeds there is the possibility of the Podemos party in Spain which could win an election if held tomorrow.  So if Syriza succeeds, why not all the other anti-neoliberal parties?

CB: Brussels must be concerned.

YK: It’s not Brussels.  The problem is this – when there was a crisis in the UD there was a Treasury and Federal Reserve Board – all working in the same direction, making coherent decisions for tackling the sort of serious problem that only happens once in a generation.

Europe, faced with similar problems, has 18 governments meeting once a month or more often when there is a crisis, and spending all night debating how to put out a fire in a system with no agreed rules for managing a crisis.

Greece is the ‘perfect suspect’.  They have violated the rules of fiscal discipline, and this is the result.

But Ireland, Spain and Portugal – where the problem did not start from the public sector, but from the  private sector (which was responding to the same incentives that the Monetary Union created – ie the mispriced echange rate risk) – they started borrowing and speeding up and then the banking system collapsed when property prices collapsed.  And who takes up the cost of these failures?  The government!

So you could say, in Greece the public sector bankrupted the banking sector, but in Ireland and Spain it was the private sector that bankrupted the public sector.  Ireland and Spain didn’t have a problem of public indebtedness, they were OK, they followed the rules.  But the rules did not anticipate all the other problems  – that a monetary union created without stronger political integration will not work, indeed has never worked in history.

CB:  But Greece?

YK: Greece to me is an example of how not to approach the Eurozone crisis, because by concentrating on ‘the Greek problem’ you perpetuate the narrative that countries that do not follow fiscal discipline inevitably lead to economic collapse.  No.  Countries that have been fiscally prudent have ended up in the same boat as Greece, which was not fiscally prrudent because of design faults in the E.M.U.

It is these design faults that need to be urgently reformed.

CB: So what is the choice for Greece?

YK: The choice is depressing.  You continue with austerity which has not produced any significant results in terms of growth for five years, and indeed has no prospect of solving the debt situation because the Debt:GDP ratio, which was 127% when the crisis began, is now nearly 180% – it is an even bigger task.

So, we either continue with that, or face the prospect of an unknown outcome,  where the Eurozone political leaders might think the situation now is very different from 2012 – a lot of firewalls have been build, a lot of protection for the rest of the Eurozone is in place.  And that means that Greece is now, perhaps, expendable, so by voting for Syriza, you are voting for a prospect that you might be kicked out of the Eurozone.

CB:  An interesting period.  What’s your take on the situation at the moment?

YK: This debate, ‘what is the problem of Greece?  What are the internal structural reforms that are needed?’ is only part of the story.  Unless the whole of the EU, the whole of the Eurozone, is reformed, then one country getting out of this hole is not remotely likely.

Tags: , , , ,