Few people could probably have predicted that the Greek debt crisis that has been building in intensity since early 2015 would finally have taken such a vicious turn as it has since the end of June. It seems clear that this was the result of a continuing impasse in negotiations between the leftist Syriza government, elected in Athens in January on a strong anti-austerity platform, and the “troika” of creditors – comprising the European Commission (representing the 19 Eurozone members), ECB and IMF) determined to continue imposing harsh measures of economic “reform”. Ultimately, faced with the prospect of imminent debt default and financial collapse threatened by the troika on 12-13 July, the Greek premier Alexis Tsipras capitulated to far more draconian demands than those which his voters had overwhelmingly rejected in a referendum a week earlier. This surrender was imposed in a way which seemed deliberately designed to cause maximum political humiliation and pain to Athens and the Greek people. Above all it was made clear that there could be no write-down or restructuring of Greece’s foreign public debt – thereby substantially reducing the amount of the debt – even though it was obvious to all, including the IMF, that there was no chance of the debts ever being repaid without this.
How can such a rancorous outcome, which has caused huge ill will not only between Germany and Greece but among other member states as well – such as perhaps to threaten the long-term cohesion of the Eurozone, if not the EU itself – have been allowed to happen? At such a moment of extreme distress affecting a member state it might have been expected there would be a display of maximum possible empathy on the part of other member states in keeping with EU traditions of community and solidarity. A similar reflection was prompted by the extraordinary spectacle of the other members of the Eurozone almost unanimously ganging up against Greece at a meeting in Brussels on 12 July – this moreover after years of hardship caused by the prolonged austerity that its people have already endured in vain. It might seem that Greece had all the more right to expect such solidarity now that it is having to bear the brunt of an uncontrolled flow of refugees from its Eastern neighbours as conflict and revolution continue to rage throughout the region. So far from sympathy, however, Greeks seem to be receiving little but abuse and bigotry from their fellow Europeans, whether at the personal or official level.
Such a collective failure of statesmanship in the Eurozone demands an explanation that goes deeper than a facile analysis of national stereotypes or the possible character weaknesses of the leaders involved. A more serious explanation would need to consider the possibility that the crisis is systemic – i.e. inherent in the institutions of the European or global economies – and that what has happened is essentially a symptom of intolerable pressures building to the point where they are becoming impossible for their leaders to control. The likelihood that this is so seems all the greater given that not only is there no sign of an end to the Global Financial Crisis (GFC), now in its seventh year, but rather that it is intensifying.
It is not hard to believe that politicians in Europe and elsewhere, increasingly desperate in the face of this loss of control, see it as politically convenient to sacrifice international solidarity in favour of simplistic nationalism – even if more sober calculation of the long-term political dangers might suggest that the resulting conflict could lead to the break-up of the EU, especially given the possible negative fall-out of a British no vote in its forthcoming referendum. Even more alarmingly, such perversity could be a symptom of the historical tendency of the rulers of states to initiate or provoke disputes with a supposed enemy when faced with intractable problems at home – even to the point of outright war (the Anglo-US attack on Iraq in 2003 is an obvious case in point).
Such a scenario seems particularly plausible in a situation where, as now, virtually every country (in the EU or outside) is basically bankrupt – and would be revealed as such if their assets were allowed to be “marked to market”. That this is the reality – and getting worse by the month – is apparent from a little publicised study produced by McKinsey in February 2015 – http://www.mckinsey.com/insights/economic_studies/debt_and_not_much_deleveraging – showing that attempts to reduce national debt burdens (public and private) since 2007 through policies including budgetary austerity, so far from leading to a reduction in global debt (as their advocates have continued to claim they would) have actually resulted in an increase of 40 per cent – to $199 trillion. No wonder the authorities in the EU and elsewhere would rather divert our attention from this and focus it instead on a powerless scapegoat like Greece.
In such a context there are reasons for suspecting that Germany’s banking sector is particularly exposed to “contagion” from debt default in Greece or other Eurozone countries. This is because, according to the McKinsey study cited above, the German financial sector itself currently has one of the highest ratios of debt to GDP among major industrialised countries, while Deutsche Bank (the largest in the Eurozone) was recently reported to have a leverage ratio of 40:1, the same as that of Lehman Bros when it collapsed in 2008). This could easily explain why the German government in particular has so adamantly refused to countenance any debt relief for Greece – even though the IMF, traditionally the international institution most committed to upholding the rights of creditors, has openly admitted that Greece will never be able to return to stability without its international debts being substantially written off. Hence, even though Greece’s debt to German institutions may be relatively small, if it should succeed in establishing a precedent for debt write-down / forgiveness it is all too predictable that other heavily indebted Eurozone countries would demand similar treatment – which, if permitted, could push the German banking sector over the edge, precipitating an even deeper world-wide financial crisis.
Another desperate remedy that Western leaders may be tempted to try could be more rapid price inflation. Yet while this could certainly help to stimulate higher incomes and faster growth in the short run, as well as serving to devalue debts and thus make them easier to service, it would inevitably run the risk of generating hyperinflation, which could be hard to bring back under control once unleashed and could soon prove even more damaging than austerity to the living standards of the poorest and most vulnerable.
The Failure of Austerity
Likewise any such development as spreading of debt default or hyperinflation could produce another “demonstration effect” equally unpalatable to the global economic establishment, namely yet more conclusive proof not only that austerity can never be a feasible path to restoring balance to an economy suffering from demand deficiency, but that, as has been well known since the depression of the 1930s, it tends to exacerbate the problem by depressing demand and growth even further. Given this incontrovertible evidence from the past, most economists have watched in amazement as Western industrialised economies have adopted strategies of austerity since 2008 without thus far precipitating rapid economic collapse.
Their ability to do so may be attributed to a combination of
highly unorthodox, expansionary monetary policies based on the monetisation of public debt – a practice known as “quantitative easing” (QE) which is akin to outright money printing;
selective deployment of the funds thus artificially created to boost the market value of government and other securities as well as assets such as real estate (QE would otherwise have been highly price inflationary, whereas in practice its main effect has been to inflate the asset values of the wealthy; at the same time it has enabled the authorities to keep interest rates artificially low, thereby saving the fundamentally insolvent financial sector from open bankruptcy) ;
falsification of official statistics so as to understate inflation and overstate real GDP growth, which in reality has been nil or negative, so as to obscure the reality of an economy trapped under an ever greater debt burden.
By means of such unprecedented market-distorting methods the world’s ruling élite have succeeded since 2008 in preventing the onset of total financial meltdown such as would undoubtedly have happened otherwise. However, this strategy – referred to by many market practitioners as “kicking the can down the road” – has obviously not brought us near to “recovery”, as leaders of such as the US Federal Reserve Board and the Bank of England have wished us to believe. Rather the intensifying Greek crisis has apparently brought us close to a point at which disbelief can no longer be suspended – when further austerity can no longer be imposed on the long-suffering masses while at the same time the global debt burden cannot be further increased, in the vain hope that by some miracle prosperity will return.
Since its inception in early 2012 this blog has sought to explain why there is no way out of our economic predicament as long as, in a world being dramatically transformed by epoch-making technological change, we remain wedded to an economic system based on unattainable rates of economic growth and maximisation of useless private profit. It is now clear that, as often predicted, a point has been reached where the sacrifices needed to satisfy the gods of profit are no longer bearable for a critical mass of the world’s people, and that if reason and humanity are to prevail the vast bulk of the capital assets must be allowed to fall to a market value that reflects their dwindling utility to society – even though this must obviously entail the wiping out of the wealth and power of the parasitic owning class.
The crisis of Greece and the Euro is an illustration of the dangers to the global community – and the EU in particular – arising from these intolerable economic tensions – and of how easily one might imagine they could descend into a shooting war. Greece is with good reason identified as the cradle of Western civilisation. If after 3,000 years it is to avoid the fate of now becoming also its grave, it surely behoves us all to unite in support of replacing our destructive economic model based on ideological bigotry, competition and conflict with one in which the more enduring values of reason, justice, cooperation and moderation are allowed to prevail.