Dr.Mutasim Elagraa
2015 / 7 / 5
-The euro crisis was inevitable. Leading economists warned at the inception of the euro that without a fiscal and a banking ---union---, a monetary ---union--- is doomed. History has proved this time and again, the last time the same happened to Argentina when in 1992 it pegged its currency to the dollar, effectively creating a one-sided monetary ---union---. The rigidity of the system caused the great Argentinian depression towards the end of the 1990, which was severe, and it dragged on until Argentina dissolved the monetary ---union--- (more precisely, a currency board but the economic effects are the same) and reintroduced the peso. One year after the reintroduction of the peso Argentina s economy started to grow robustly and the crisis was over sooner than many have thought.
- An own currency is the most important economic policy tool. Once a country enters into a monetary ---union---, it loses this tool, which can be skillfully used to respond to a variety of negative economic shocks. For example, if a country has slower productivity growth than its trading partners,´-or-if it has higher inflation, in both cases the country becomes less competitive, it cannot compete with its trading partners in global markets and in its own domestic market, where imported goods become cheaper and better and more appealing. This loss of competiveness leads to the closedown of many factories and economic establishments in the country, thus generating greater unemployment and a fiscal crisis (high budget deficit) since tax revenue will fall because companies have closed down (so no business tax), and because workers are laid off (so no income tax revenue). The situation aggravates the budget crisis since the government has to support the laid off workers one way´-or-the other. So when a country suffers differential productivity growth (ie either it has become less productive´-or-other countries have become more productive either because they work harder, better´-or-because they use more advanced technology),´-or-when it runs higher inflation than its trading partners, it becomes less competitive not only in global markets, but in its own domestic market as well. The solution for this recurrent and very common problem is very simple: the country has to devalue its currency´-or-let it fall. This will make the country s exports cheaper in global markets (so exports increase and the country can export its way out of trouble). The same devaluation will make imports more expensive in the country s domestic markets, so its citizens will buy less imported goods and more home produced goods (so domestic production for domestic markets will increase). This way production will increase in the country, employment opportunities will expand, tax revenue will increase and government spending on the unemployed armies will fall.
- Now this differential productivity growth happened to Greece: productivity in other countries in the euro zone grew faster, especially in Germany. And the problem was compounded by the fact that inflation in Greece was slightly higher than the 2% target agreed upon within the euro ---union---. The devil problem is Greece has no currency to devalue and solve the problem once and for all. Once a country doesn t have a currency to make an external devaluation , all that is left to it is internal devaluation in the form of wage cuts, mass layoffs and budget cuts in the form of defunding critical public services, including health, education and transfers to the poor. Internal devaluation is far less efficient and far more painful than an external devaluation - a small to medium currency devaluation is less painful than wage cuts and mass unemployment. Greece did its painful internal devaluation, severe wage cuts were implemented, and public sector workers were laid off en mass. In 2014 its unemployment was 26% a catastrophic rate even by third world standards.
- Now the Greek crisis was not created by the Greek government alone. Germany played a key role in generating the crisis not only in Greece, but in weaker euro-zone economies as well (Portugal, Italy, Ireland and Spain- the so called PIGS). The agreement among the euro-zone members was that every country should run a 2% inflation. Germany cheated by consistently running an inflation well below that target rate. And this is not only cheating, it is destabilizing to other members. In monetary ---union--- running a lower inflation than the agreed target is as destabilizing as running a higher inflation. So by running low inflation (by keeping its wage level growth well below productivity growth) Germany has become super competitive at the cost of its hapless weaker partners. So German products drove out Greek and other products in export markets and even inside domestic markets. This generated the high unemployment and fiscal crises (high budget deficits) as a result of the ensuing loss of output and employment. To cope, Greece borrowed and borrowed but no one can borrow forever. The Greek debt has grown so much and now it stands close to double the annual Greek GDP (national income).
- So now this is the problem. Greece has a huge debt that its creditors want to collect, but they know that they can t get all their money back quickly, if at all. But for them it is not just the question of getting their money back, they also want to use the problem to force Greece to implement neoliberal reforms , such as pension cuts,-limit-ing the role of government in the economy, deregulation of financial and labor markets, and mass privatization of state owned enterprises. These reforms are more strategically important to the creditors than getting back their money, and they know that Greece will never be able to pay back all its debt.
- Now the creditors, the so-called troika, want Greece to implement full neoliberal reforms , but the Greek government is willing to do part, not all of these reforms, and that is why the troika has been inflexible by refusing to provide Greece with further loans to pay back its debt. Some of these reforms requested by the troika are reasonable and legitimate, including reforms of retirement packages and retirement age). Greece already runs a budget surplus, which it uses to pay part of its debt and the interest on them. So if the troika agrees to a bailout, in the form of further loans, these loans will not be consumed by the Greeks, they will be fully used to pay the creditors. In other words, creditors will give Greece new loans so that Greece can pass the money back to the same creditors to repay older loans- what the Greek finance minister called pay and pretend .
- The troika s insistence on Greece to run a 3% budget surplus to pay back its debt is fundamentally flawed. An economy is not like a person. As a person, if you save more, you can pay back your debt faster. But in an economy, if you save more by cutting your spending, I lose my income because you are not buying the falafel I sell, so by cutting your spending, you may reduce my income and thus reduce national income. That is why if an economy runs a high budget surplus such as the suggested 3%, the economy will shrink, national income will shrink, and the debt burden will be heavier because its ratio to income will worsen. Remember, the absolute size of the debt doesn t matter, what matters is the ratio of debt to income, that is a why a trillion dollar debt is no big deal for America, but a few billions in debt can be devastating to a poor country. When a government cuts its spending (to achieve a budget surplus), a lot of companies will go out of business because there will be less demand for their products, they will be able to sell less, output will fall, and unemployment will soar. When the national income fall, the ratio of the accumulated debt to income will worsen (if bill gates has a million dollar credit card debt, it is no big deal, because it is a trivial percentage of his income, but if one of us has a 50,000 dollar debt, that is a serious crisis for many and nearly suicidal for others, myself included).
- So the creditors, represented by the troika, are insisting that Greece pays back its debt by continuously shrinking its economy, which has already shrank by 25%. It will be foolish for a person to solve his debt problem by producing less income, but this is exactly what the troika is asking the hapless Greeks to do. And it is far worse than cruel. Greece will not only fail to pay back its debt by killing its workers and producers, this course risks enlarging left wing parties, but more worryingly it risks enlarging the appeal of far-right and fascist political parties all across Europe.
- The creditors know that fiscal austerity (high budget surplus) in the midst of the Greek depression is not only a medicine worse than the disease, it is also self-defeating on pure fiscal terms since the reduction in output and employment will result in lower and lower tax revenues for the government. The creditors know this full well, they are not ignorant, so why are they insisting on chemotherapy to treat a bad malaria? There are two reasons: a) this is the creditors chance to enforce neoliberal agenda in Greece, consisting of wage cuts, pension cuts, cuts on social, health and education spending and mass privatization of state-owned enterprises. Some high ranking Germans have even suggested that Greece should sell some of its splendid islands to pay its debt, b) the creditors are afraid that if they bailout Greece, and let its left wing government get away with it, this will encourage other left wing parties and the exact Greek scenario will play out again in Italy, Spain, Portugal, Ireland and possibly even France. So the problem is not a technical one about what is the best way to deal with the problem. The answer to this question is simple for anyone who understands basic economics: end the austerity, bailout the unlucky Greeks, let the economy grow, and once it starts growing you can implement some, not all, of the reforms suggested by the troika and pay back the debt. But at the heart of the unfolding Greek tragedy lie considerations of power and politics, not economic technicalities, hence the deadlock.
Mutasim Elagraa is an economist with the United Nations Conference on Trade and Development (UNCTAD), in Geneva. His views do not necessarily represent those of the United Nations secretariat.
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