The Greek debt crisis and the end of Social Europe

Following the “Greek” crisis in the news can be puzzling for the average observer, who watches befuddled as “lazy Greeks” and their “profligate welfare state”, threaten her country’s fragile economic recovery. The situation becomes even more incomprehensible as the public discourse progresses from reports on the impending doom to reports about “rioting Greeks”, who quite ungratefully seem to be rebelling against their country’s own “salvation” by another massive ECB/IMF loan to their government. All this may detract the reader from the fact that what is going on in Europe right now is a massive transfer of money from European taxpayers to European banks via the Greek state, as well as the scariest breakdown of democratic politics in a very long time. The proverbial “European democratic deficit” has come home to roost. To understand this one needs to have a little more background on the crisis.

First, the so-called “Greek crisis” is in reality a deep crisis of the European banking system. European banks were propped up after the 2008 through a huge socialization of their risk by transfer of their liabilities onto public accounts. This was not enough to save them. Their financial situation became shaky again, once it became obvious that they were holding sovereign debt that was worth much less than its nominal value. The weakest link, Greece, started having difficulties funding itself in the bond markets. The prospect of a Greek default spelled the potential downfall of the significantly weakened European banks, to which the ECB and the European Commission reacted promptly, with an approving nod from the U.S. and China.

In addition, the crisis is one of the euro itself. The European elites that designed the euro overlooked all warnings about the dangers of binding together under the same currency economies of different caliber without a unified fiscal policy and substantial transfers to make up for the trade deficits that would necessarily end up on the weakest members’ accounts. The graft and corruption of the Greek elites is part of the explanation for the fact that Greece let itself become the weakest link, but Ireland, Portugal, and Spain are inexplicable without a structural account of how the entire European periphery found itself up to the neck in debt despite fiscal austerity measures of more than a decade in some cases. This account includes at least two elements. One is the lack of any mechanism in the design of the monetary union to deal with balance of payments crises, and the other is Germany’s tendency to feed its trade surplus with its EU partners by stimulating demand via loans to the PIIGS guaranteed by their sovereign bonds. The second element is also a story of graft and corruption. But this time, it is private corruption of European companies responding to the corruption of Greek elites and hoisting the Greek people with unnecessarily high prices for lucrative state contracts.

Second, the loan that the Greek government will try to push through Parliament this week is not a bailout of Greece or the Greeks. Greece is bankrupt already, it has been since May 2010, but is not allowed to default or somehow restructure in order to protect the European banking system and the euro itself, as well as the stability of a fragile global economy interconnected by a web of debt guaranteed by more debt. According to the Greek government’s budget for 2010, Greece was to receive 53 billion euros from the ECB/IMF mechanism. In turn, it was to pay 50 billion of these to its creditors (32 for interest on the long term debt, 18 for rolling over short term debt). Thus, the Greek ‘bailout’ is siphoning money from the European taxpayers (and American via the IMF) who are funding it, back to European banks who are the holders of Greek bonds that need servicing. The latter are for the moment held unaccountable for their bad bets, even though they unrealistically equated Greek sovereign debt to the German one. They are also given the time to try and hedge against an upcoming Greek default. The ECB is another big loser in this because as the de facto lender of last resort it is holding a lot of Greek sovereign debt. That’s the European taxpayer again. Thus, the ECB wants to hear nothing about “forcing” any creditor to do anything that they have not contractually agreed upon.

Unless of course we are talking about Greek workers’ rights as creditors of the Greek state’s promises about wages and pensions. Those can apparently be unilaterally discharged without further ado. The average worker is the object of punitive measures justified on a fantastic narrative of Greek laziness supposed to satisfy the Germans who think they are transferring money directly to the pockets of the Greeks.[1] In the midst of an economic crisis the measures have sent the economy into a downward spiral. Wages and pensions have been cut by up to a quarter, thousands of small businesses have closed, and the unemployment rate among the youth has reached the dizzying rate of 40%. All of this was predictable and indeed predicted long before the Greek government, which was elected on the promise of taxing the tax-evading rich, accepted the first loan in May 2010.

Furthermore, against any measure of reality Greece is held up for the rest of the world as an example of why the “welfare state” has failed. Greece was never a welfare state. It is a corrupt, clan-cased cash machine for the insiders, with the outsiders left to fund education, health, housing, and any other services that a welfare state would support on their own. It is a low-productivity economy, based on low wages, family provisioning, and public employment as a substitute for welfare for the one quarter of the workforce who can get such jobs. Which is why the notorious “internal devaluation” plans, based on the idea that what Greece needs is to depress its inflated wages, are completely misguided, and characterized as such even by researchers of one of the biggest private banks in Greece.[2] The main loss of competitiveness since joining the euro in Greece apparently did not come from a rise in labor costs relative to our competitors in services, but rather from a rise in costs from the excessive increase in industry’s margin of profits since 2000, which led to a worsening of our trade balance.[3] Depressing wages even further is therefore like trying to put out a house fire by blowing at it. Worse, it is like throwing petrol at it, since you are helping in the collapse of aggregate demand.

Now let’s turn to the breakdown of democratic politics at the national and European level. The loan agreement presents all sorts of constitutional problems for Greece, as well as for the EU. There is a good argument that the ratification of the loan agreement was unconstitutional since it is a sui generis international treaty between Greece’s creditors and Greece and it therefore requires approval by 180 MPs, as opposed to the 153 who voted for it. It is not an act of any EU institution nor is it a regular act of the executive, in which case there would be no need for ratification by the Parliament. At the European level, the Council decisions addressed to Greece that incorporate the terms of the ECB/IMF loan agreement are also arguably in violation of the Treaty on the Functioning of the European Union, because they basically dictate in detail tax, wage, and social security policy all of which belong to the exclusive competence of Member States and therefore cannot be adopted on the basis of the Treaties as they stand.[4]

Since there were no procedures foreseen to deal with such a crisis some procedure had to be made up on the go of course. But that does not detract from the fact that we are in a situation where fundamental questions of tax, social security, and wage policy for the countries that are receiving loans from the European Financial Stability Facility (EFSF) have been de facto transferred to the European level without any proper mechanism for ensuring democratic legitimacy. Worse still, governance at the European level seems to be supremely tone deaf to the current legitimacy crisis at the national and European levels. What else can a decision by the EFSF to place Goldman Sachs as joint manager of the Portuguese bonds amount to, when GS colluded with the Greek government to hide the true degree of Greece’s public debt in order to ‘facilitate’ Greece’s entry to the euro? What else but tone deafness to legitimacy questions can it be that the most peaceful demonstrations in recent Greek memory are overwhelmingly reported on throughout Europe as “riots”, when the accompanying photos are actually depicting the June 15th police brutality against protesters exercising the constitutional right to association and speech?

A poll of the protesters last week showed that 87% of them would like Parliament to vote down Papandreou’s new government and refuse the “bailout”, while 47% in a national poll said they would prefer for the loan to be rejected, as against 34% in favor of getting the new loan along with the austerity measures. Greeks already knew very clearly that the “vote of confidence” in the Greek Parliament on June 21st was a theatrical exercise aimed outside of Greece, where nervous “markets” were watching closely in order to gauge the risk of an immediate Greek default. The vote of confidence went as expected. The Greek Prime Minister won the confidence of 153 out of the 300 MPs and then everybody had to be rushed out through the back door with heavy police protection to guard them from the people whose confidence they were supposed to have just won. Instead of trying to represent the legitimate protests on the street as the result of Greek populism and provincialism, the government could pay heed to the fact that a critical number of citizens are reaching the breaking point, and use those facts to push back instead of acting as the steward of European elite interests.

Even better, it should seek alliances with the peripheral countries that share a common interest with Greece in fixing the problems resulting from a monetary Union without common fiscal policy and a transfer union. What would a Greek government push back towards is of course the next obvious question. A Europe-led restructuring of the debt of burdened countries along with a correction of the structural problems of a monetary union without fiscal policy should be the order of the day. Greece itself needs a lot of institutional reforms, but this could take years. A fire sale of its assets and an impoverishment of its citizens for years to come is not a solution, as we already know from similar experiences in Latin America and the former Soviet Union.

But a “Europe-led restructuring” is an empty vessel and can take many different forms with radically dissimilar distributional and political consequences. One can imagine a “European led restructuring” that completely embraces the ECB/IMF’s current version of how a country should grow, namely through depressed wages, fiscal austerity and migration. In fact, this seems like the likeliest option under current political conditions. The problems of this version are poignantly illustrated in the recent NPR story detailing how the Chinese company that runs a part of the port of Piraeus is importing Chinese labor conditions to a Greek workforce terrified and without alternatives to uninsured, dangerous, and low-paying jobs.

The fact that this is what European policy amounts to today spells the end of dreams of “social Europe” as a bulwark against the social disruption inevitably created by debt ‘guaranteed’ by more debt moving freely throughout the globe. The EU’s emergency wholesale abandonment of a social vision for Europe is perhaps the most politically explosive part of the situation. The European project is losing the confidence of European electorates. Paradoxically, herein also lie the possibilities for transformation. It is possible of course that European citizens will buy the story of the lazy Greeks, take more medicine themselves and hope that the same will not happen to them because they are hard working (and European). But there is also the option that as the Greeks become more and more despondent the version of recovery currently peddled by the EU will cease to convince the average European, who might awaken to the possibility that some such similar fate awaits them down the road. The unprecedented trans-European dialogue of protesters from London, to Spain, to Greece, carries some of that promise.

I personally hope that the latter is the option that comes to pass.

[1] Greeks work harder than Germans. Check out the stats from Eurostat http://www.phantis.com/news/southern-europeans-work-more-longer-germans-study )

[2] Dimitris Malliaropulos, How much did competitiveness of the Greek economy decline since EMU entry?, Eurobank Research 2010

[3] id.

[4] http://www.dsanet.gr/epikairothta/mnimonio/blog/N_B.pdf