Thursday, May 5, 2016

An alternative for Greece

Nikolaos Bourtzis (Guest blogger)

There we have it again. Another one of those clashes between Greece’s creditors and the Greek government. For the millionth time, the Troika, I’m sorry I mean the institutions, are demanding that Greece comes up with policy suggestions that could bring in 3.6 billion approximately in fiscal savings.

This time, though, is different because these are going to be a “just in case” package, a buffer in case the government misses its fiscal targets. The government wants to finish the negotiations as soon as possible in order to remove the uncertainty that has grinded the Greek economy to a halt but it does not want to pass any preliminary measures. The negotiation on other issues is coming closely to an end, or so it is being reported, but this issue persists and the final decision is to come from the urgent Eurogroup meeting on Greece that will take place on the 9th of May.

Why all this fuss? Well, Greece urgently needs a disbursement of some of its 80 billion euros bailout money in order to cover its debt payments that are coming up in the summer. In addition, if the measures that are agreed upon during the negotiations are passed, the “forbidden” book of debt relief might be opened. The IMF insists that Greece’s public debt is unsustainable and some sort of debt forgiveness is necessary or else it won’t be able to take part in the bailout. And it might just be the case that the IMF is capable of doing anything in order to impose its ideology (Hint: The recent leaked discussion).

How is it that more austerity will make the public debt more sustainable, though? A form of debt relief was granted to Greece in 2012 with the so-called PSI. Interest rates on its official loans are at rock bottom; not having to pay 5 % or 10 % interest payments could be seen as a form of debt relief. How come that is not enough? This back and forth between the Greek governments that have passed by the last 6-7 years and the official creditors has always ended up with more austerity, more deregulation and well, more of the same; more of the same failed policies that are not even addressing the root of the problem; the depressed Greek economy. If the Greek economy were growing, nobody would be worrying about Greece’s debt. Public debt should never be a problem and it doesn’t have to be. The real issue that both the creditors and the Greek government are not paying attention to is how to get the economy back on its feet and put an end to the humanitarian crisis that is plaguing the nation.

There is only one way to put an end to this. Grexit; yes Grexit. It’s going to be difficult in the beginning but it might be the only sustainable long-term solution. The Bank of Greece would have to secure enough reserves, through some sort of external loans, to support the exchange rate and to pay for imports. Printing new bills would take some time so the euro and the drachma would probably have to coexist for some months. The banks would have to be nationalized since a bank run is very probable and no external funding would be available for them. But the point here is that Greece’s economy did not tank because public debt is high nor did it tank because it has severe structural issues, which it partly has. The Depression was a result of a severe fall in aggregate demand. The financial crisis took a toll on Greece’s banks, which then had to be nationalized. Lending contracted along with consumer and business spending. That’s where the government has to step in with aggressive fiscal expansion that will invigorate “animal spirits”. The structural reforms, that the creditors want Greece to pass, are not going to do anything to support demand, and austerity has depressed aggregate demand even more. That is the main culprit of this disaster. Government spending does not have to be constrained by borrowing. If Greece had its own currency, it could fund income support and employment programs with central bank credit; yes, by printing money. Mainstream economists will scream “hyperinflation” if anybody proposes such kind of policy. With the economy operating well below capacity, inflation is not going to be a problem and it’s actually needed. The economy is experiencing debt deflation right now. Unserviceable debts need to be dealt with immediately if consumer spending is to pick up for good and the only way to do it is if the government provides assistance to troubled borrowers.

That should have been the official “Plan B” of the Greek government; Grexit. The debt cannot be serviced and it needs to written off. The Greek economy and the Greek people have been sacrificed on the altar of debt servicing and it has to stop. There is a way to recovery that does not involve any more of the so-called “internal devaluation”, which is obviously not working. Wages have collapsed by almost 20 % and unemployment is still stuck at 25 %. Greece can rebuild its economy but only outside the Euro. A well-designed industrial policy could bring manufacturing back to life, employment and training programs can bring down the prohibitively high unemployment and the reversal of social spending cuts can help alleviate poverty. Comprehensive regulation of the financial system could prevent a repeat of a financial crisis and direct lending to the real economy. Finally, the labor laws that were repealed need to be brought back and labor unions need to be strengthened if wages are to go up. Labor unions and collective bargaining were one of the reasons for the thriving middle class all over the world until the era of neoliberalism in the 1980s.

Unless a government that is bold enough to stand up to the neoliberals of the EU and the IMF takes power, the theatrical negotiations will keep going, the government will keep caving in and more of the same failed policies will be implemented.

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