Avoidable tragedy

Print edition : July 24, 2015

Protesters wave a Greek flag and hold a placard reading "IMF+Troika=Criminals" in front of the European Commission's headquarters in Barcelona during a demonstration in support of Greece on June 29. Photo: LLUIS GENE/AFP

Pensioners queue in front of an open Piraeus Bank branch in Thessaloniki, Greece, on July 1. Even such payments put more pressure on banks than they could bear, underscoring the choices facing the government and voters in the referendum. Photo: Konstantinos Tsakalidis/Bloomberg

The refusal of European authorities and the IMF to address Greek debt restructuring exposes their desire to placate financial capital, but it may end in a Grexit that undermines the idea of the union.

THE endgame is nearing in Greece. THE latest rejection by eurozone Finance Ministers of any extension of a proposed bailout plan was followed by the decision of Greek Prime Minister Alexis Tsipras (subsequently supported by a majority vote in parliament) to put the terms of the bailout to the Greek people in a referendum. Since that would send the country into a technical default to the International Monetary Fund (IMF) by June 30, and make a run on the banks inevitable, by June 29 Athens had been forced to impose a bank holiday and capital controls, at least until the proposed referendum on July 5 and possibly even thereafter. This would put a temporary stop to the almost continuous leeching of funds from Greek banks that has intensified over the past month, with people withdrawing money in anticipation of a “Grexit”, or Greek ejection from the eurozone.

The euro ship is now in uncharted waters, and the outcomes in both Greece and the rest of Europe are truly unknown. In the mainstream media in Europe, the blame for this is being laid squarely on the shoulders of the Leftist Syriza government in Greece, but in truth it is the handling of the crisis by the European authorities that has been utterly shambolic. It is difficult to think of a more unnecessary catastrophe that could have been averted at any time in the past five years with just a little more vision and flexibility on the part of European leaders.

The essence of the problem is that Greece is now saddled with a debt that it simply can never repay. Much of this debt is indeed not because of recent “new” loans, but rather the accumulation of unpaid interest compounded into the principal amount so that the debt-to-GDP ratio has actually increased from less than 100 per cent to more than 175 per cent of the GDP over the past few years, without any funds coming into the economy. The so-called “bailouts” provided by the European Union and the European Central Bank have really gone to repay banks in Germany, Austria, the Netherlands, etc., while the Greek people have not benefited at all.

The obvious and inevitable solution is a restructuring of the Greek debt. In fact, at one point this was even explicitly recognised by the IMF. But so far the E.U. has stubbornly resisted even contemplating this option, nor has it recognised that Greece’s problem is one of insolvency, of debts that cannot conceivably be repaid in full. Instead, it has insisted on grinding austerity measures that have already caused the national income to decline by more than a quarter over the past five years and destroyed employment and basic social services, and along with that the hopes of an entire generation. It has already created massive inequality and growing hardship for ordinary citizens as social services are cut and even public order is difficult to maintain.

Yet the E.U. and its leadership have persisted in kicking the can down the road rather than actually addressing the issue of debt restructuring, forcing the Greek people into ever greater hardship. What is more, the latest negotiations indicate that the the E.U., the European Central Bank and the IMF are unwilling to bend even with respect to the details of the austerity programme, requiring cuts in public sector workers’ wages and pensions and other cuts in public spending, rather than accepting the Greek government’s proposals for other measures that could increase direct tax revenues.

The manner of the negotiations was also suggestive of the desire to somehow force a regime change in Greece by making the position of the Syriza government untenable and making it impossible for it to function, much less provide some of the relief that it had promised the electorate. This approach is not just diabolical but truly cynical. The distaste among European leaders for a government that wants to listen to its people and protect the citizenry from further economic damage was matched by the fear that any Syriza success could have a domino effect in encouraging similar movements elsewhere (such as the rising Podemos party in Spain).

The decision by Tsipras to put the terms of the bailout to a referendum of the Greek people was greeted with shock and horror in Brussels as well as other European capitals and even criticised by IMF Managing Director Christine Lagarde. E.U. chief Jean-Claude Juncker declared that he felt “betrayed” by the “egotism” and “populism” of the Greek leadership, which actually chose to consult its own people (rather than accept terms that would greatly affect them without any consultation). The referendum was indeed the only sensible way to proceed given the options that Tsipras had been offered: agreeing to the punitive and aggressive bailout terms and thereby losing all credibility with his people or holding out against those terms and thereby be accused of precipitating a Greek default and potential exit from the common currency.

For Greeks, the continued pledge to even more grinding austerity with no end in sight and no apparent economic reward for this sacrifice in this generation is clearly an undesired choice. But it is possible that they may still choose that these deeply punishing terms be imposed if the fear of leaving the eurozone turns out to be greater. This is clearly such a significant choice that it should not be made by a government if the referendum option reflecting the will of the electorate is available.

But the E.U., by reacting with outrage and refusing to delay the extension of the bailout renewal decision, has effectively sought to punish the Greek government for this democratic attempt to consult the people on what would affect them so deeply. This confirms the contemporary tendency of capital—and finance capital in particular—to abhor the practice of democracy and to create and support governments and supra-national institutions that actively seek to suppress it.

For Greece, there is no doubt that there are worse times ahead in the short term. Banks are likely to fail, there will be some amount of chaos and associated instability, and economic activity will be hugely disrupted, with adverse social consequences as well. But if the country is forced back into another currency (drachma or something else), then a significant devaluation will at least allow the economy to recover over time. Further, since the country currently runs both a budget surplus and a current account surplus, it can manage for some time, and even seek to grow its way out of the mess through implementing policies that allow demand to recover and emphasise employment generation.

For the rest of the E.U., however, there are even greater long-term concerns. At present, various European leaders seem to feel that they have managed to ring-fence Greece (which is anyway a relatively small economy within the eurozone) and will suffer minimal disruption if it exits the eurozone. But this is short-sighted indeed, and the entire process is likely to boomerang on them because of unanticipated outcomes.

Since faith in a single currency is strongly linked to perceptions of solidarity and support within the currency union, this rejection of support is likely to have serious effects. Indeed, one commentator (Larry Elliott writing in The Guardian) has already called it the E.U.’s “Sarajevo moment”, drawing parallels with the assassination of Archduke Franz Ferdinand in Sarajevo in 1914, which was subsequently recognised to have led to the First World War, even though at the time that event in a relatively small country in Europe was generally dismissed as not very important.

This is likely to be the start of the unravelling of the currency union and may well have implications beyond that to other aspects of the E.U., both economic and political. The economic and geostrategic fallout is immense. Already, U.S. President Barack Obama has called German Chancellor Angela Merkel to express his concern.

The current events—in particular the aggressive intransigence of E.U. leaders—will seriously undermine confidence that the union will sustain. Financial investors will inevitably focus on other perceived weak links; the names of some countries in the eurozone periphery, from Portugal to Spain to even Italy, are already being bandied about.

Once finance capital starts to bet on the possibility of such enforced departures, no amount of pious declarations by European leaders will be able to divert them if the lack of commitment and solidarity has been proved in one case.

This need not happen immediately, but certainly both the idea and the implementation of the eurozone will be dramatically weakened. And this will affect both the strong and the weak in the eurozone. Indeed, Germany, which has been one of the biggest winners in this currency union, may well be the biggest loser from the beginning of its dissolution.

But there is more than economics at stake here. The very idea of European unity was in some ways a deeply idealistic one even though in practice it was driven by corporate interests. But going back on the economic union—no matter the size or strength of the economy that is ejected—will definitely have political and strategic effects as well. A Greece abandoned by its former partners will be forced to seek allies elsewhere, and these may not always be to the taste or in the interest of other European countries. Worse still, if the process creates political instability and turmoil in Greece, the repercussions will necessarily be felt among its neighbours and further afield.

It cannot be that other European leaders do not see all this. So their entire approach to this problem remains a source of wonder. What can they be thinking? And what obsessive desire to placate finance capital can be so strong as to put under threat the entire European project, simply to punish the government of a small country that dared to speak up for its people? In the war between finance and democracy, this particular battle may not be the decisive one, but it should certainly clarify minds as to the real stakes involved.