Greece cannot escape

At the end of January, finance officials from the Troika (EU Commission, ECB and the IMF) and the finance ministers of Germany and France held a secret meeting to discuss what to do about Greece.  Greek government officials were not invited.  They were trying to figure out how to tackle two issues threatening to unsettle the fragile economic recovery in Greece and the broader euro zone;  1) how to press the Greek government to forge ahead with unpopular ‘structural reforms’; and 2) how to scramble together extra cash to cover a shortfall in the country’s financing for the second half of the year, estimated at €5-6bn.  The meeting was inconclusive.

But what is clear is that on its own Greece cannot escape the debt deflation trap that it has descended into. Gross public and private debt relative to GDP has risen to record proportions and is still rising. Greek companies have the highest debt to equity ratio of modern economies at 235%, more than twice the eurozone corporate average. These debt ratios are rising partly because the deficit on Greek government budgets is only just been closed, but mainly because nominal GDP growth remains non-existent while the cost of servicing debt continues to rise.

And another liquidity crisis is approaching just as the Euro elections take place.  Greece faces a large maturity of government bonds in May of €11bn. And yet the IMF hasn’t disbursed any promised aid to Greece since last July and is now €3.8bn behind in its scheduled aid payments under the current bailout package. The IMF insists on having a clear view of the country’s finances 12 months ahead and this condition hasn’t been met.   The cruel irony is that Troika funds go to the Greek government through an ‘escrow’ account (not controlled by the government) to be used to pay government creditors who turn out to be other EU governments and banks!  So hardly any of the bailout funds touch the sides of the Greek economy and the people.

The Greek coalition of the conservative New Democracy and the formerly social democratic PASOK (the government is now reduced to just two parties with a three-seat majority) is making lots of noises about how the government budget is now in balance; that no more austerity is necessary and that Greece might even be able to raise funds from the global bond market this year.  Sure, the government has managed to obtain a surplus (before interest payments on debt) in 2013 of €812m.  But the idea that Greece is out of the grip of austerity and will avoid a debt deflation crisis is hogwash.

For a start, this budget ‘surplus’ was only possible through extreme austerity cuts on government spending.  Tax revenues still fell short of target.  More important, as a recent OECD (not part of the Troika) report argues
(see here,,
the economic depression that began in 2009 shows no sign of abating. The OECD expects a contraction in real GDP of another 0.4% this year.  Given that prices are deflating at around 3% a year currently, that means a contraction in nominal GDP of close to 4%, driving up the debt ratio in simple mathematical terms.

Currently, the public debt ratio is over 180% of GDP and the economists of OECD predict that by 2020 Greece’s debt pile will still stand at the astronomical level of 157% of GDP in contrast to 124% that Troika is expecting. And even the Troika’s target is still double that set for Euro member states to meet by the end of next decade.  The OECD reckons that the Greek public sector must run a surplus of 4.5% of GDP from now in order to get its debt ratio down to the Troika target.  The OECD reckons that won’t be achieved until 2018.  The reality is that further austerity for another five years is both politically impossible and economically futile. Greece will never do it.

Greek deflation

What is the alternative then?  Well, up to now Keynesian economists and many on the left have advocated that Greece needs to break with the euro and the German-led Troika bailout packages.  Greece should restore the drachma and then devalue to boost exports and inflate away the real value of debt.  In short, Greece should ‘do an Argentina’ and default on its public debts.  Two-thirds of the outstanding Greek government debt is held by the Eurozone bailout mechanisms and the IMF.  The other third is mainly held by the Greek banks.

Two things spring from this alternative policy.  First, was the Argentina option of 2002 a success?  In previous posts, I rejected this option (of voluntary devaluation)  because the experience of Argentina was partly exceptional and would eventually prove unsuccessful (see
If the euro crisis is a crisis of capitalism and not just a problem of the euro as a ‘too strong’ a currency, then devaluation and debt default on its own would only be a temporary palliative for Greek capitalism – and no more pallatable for working people than euro-defined austerity, as it would mean hyperinflation and a collapse of businesses laden with euro debt.  The current renewal of Argentina’s crisis has confirmed that prognosis
(see my post,

Paul Krugman was one leading Keynesian economist (along with some Marxists) who advocated this ‘solution’ for Greece.  But having seen his solution/prediction of euro collapse and Greek default fall short, he has started to moved to the opposite.  “So is the euro crisis over? No — it’s not over until the debt dynamics sing, or perhaps until the debt dynamics sing a duet with internal devaluation. We have yet to see any of the crisis countries reach a point where falling relative wages are generating a clear export-led recovery, or in which austerity is actually paying off in falling debt burdens.  But as a europessimist, I do have to admit that it’s now possible to see how this could work. The cost — economic, human, and political — will be huge. And the whole thing could still break down. But the ECB’s willingness to step up and do its job has given Europe some breathing room.”

And it’s true that for the Eurozone as a whole, if there is no political upheaval that overthrows pro-austerity governments (as we are seeing possible only in tiny impoverished Bosnia right now), then eventually enough capital value will be destroyed through bankruptcies, unemployment and an investment strike to raise profitability in surviving Eurozone corporations and the ‘whole crap’ can start again – after huge human cost, as Krugman says.

However, I am not sure that even this is possible for Greek capitalism, which is not just on its knees but is prostrate with life support mechanisms not working.  It’s true that the crushing of the living standards and wage earnings of Greek households is making Greek industry more ‘competitive’ – labour costs per unit of (falling) production have dropped 30% since 2010.

Greek ULC

But the task of turning the Greek economy by its own devices is probably just too much.  Just look at the level of debt in the public sector that Greece is burdened with compared to other Eurozone states and compared even to where it was back at the end of Great Depression of the 1930s (1938).   Greece is on its own.

General government gross debt (% of GDP)

Source: IMF (2013) and OECD (2013).

The Euro elections approach and current opinion polls in Greece suggest that the leftist SYRIZA party will lead in the vote and take the most seats.  It is also likely to take control of local government in the major cities.  So the pressure is mounting on the coalition and its policy of complying with Troika austerity measures in return for bailout funds to cover government debts and bail out Greek banks.  The coalition is now talking about amending the Euro election rules for party votes to try and reduce the chance of defeat by SYRIZA.

The Troika wants the conservative government to survive.  It does not want to be faced with a SYRIZA-led government refusing to implement the current bailout terms and wanting to revise them. So it is discussing how to provide extra funds for the coalition to keep them going and avoid either default or even more austerity that could break the Greek camel’s back.  The Germans don’t want to cough up any more money but they will probably agree to relax the terms of repayment of debt, perhaps by rolling over that debt perpetually – after all the UK did not pay all its war debts back to America until 2002!  But just relaxing the repayment burden does not restore Greek capitalism.  Unless the Eurozone leaders write off the loans to Greece and/or the region as a whole makes a dramatic economic recovery in the next year or so and this revival ‘trickles down’ to Greece, Greek capitalism will remain imprisoned.

5 thoughts on “Greece cannot escape

  1. If I remember correctly, Greek unit labour costs were already quite low before the GFC. Now look at them! The capitalists, who hire workers to make goods and services for sale in Greece and elsewhere in the global market, will make super rates of profit.

  2. You are right that the option of pulling out of the Euro etc. is no solution. It would impose massive inflation on the workers of Greece, and provide no solution to the fundamental problem that Greece’s consumption is greater than its production. The problem that faces Greece whatever mode of production ruled there is how to change that basic economic reality. In fact, austerity is never going to work. Where a Keynesian argument possibly does have some validity is in the same way that Marx outlined its role in bringing about primary capital accumulation.

    In order for Greece to be able to produce more than it consumes it needs to accumulate capital, and that is not going to happen in a context of severe austerity. But, Marx points out that in Britain, a central lever in primary accumulation was the massive build up of public debt. UK debt to GDP ahead of the Industrial Revolution rose to 250% of GDP, which rather puts the 180% currently in Greece in the shade. UK debt to GDP rose to a similar level in the 1950’s, as British Capital built up debt to invest in restoring the infrastructure, to create the welfare state, and recapitalise core industries like coal, steel, rail etc. The history, and basic business finance shows the Tories arguments about not being able to reduce debt by taking on more debt is a crock of ideological shit. Successful companies and economies as a prelude to that success have always run up addition debt to invest. But, that is the point that Joan Robinson pointed out long ago. There is a difference between borrowing to invest and borrowing to consume. As you point out, currently Greece is just borrowing to pay off interest!

    But, its hardly evidence either of a crisis of Capitalism. What it is evidence of is a political crisis in Europe that stems from the failure to create a single European state, in which there would be a single fiscal regime, a single debt issuing authority, and a means thereby of channelling funds from the central state to investment in the necessary productive-capital, or the necessary infrastructure etc. that provides the level of aggregate demand that encourages capital more widely to invest. The creation of the necessary infrastructure etc. was after all a central element in the development of areas like Singapore, Shenzhen and so on.

    What we have in Europe is a political crisis arising from the fact that 21st century economic relations are confined within 19th century, national political structures, i.e. the nation state. That political crisis is certainly causing economic consequences in the same way that Marx describes the way a financial crisis can spill over to affect the real economy, as happened in 1847, 1857 and 2008. But, this is not an indication of some fundamental economic crisis of capitalism.

    Until the last year or so, most of the Eurozone was growing strongly. In fact, Germany and some countries like Sweden were growing at almost BRIC levels. Germany continues to be the second largest exporter behind China, the EU has a trade surplus with China etc. The Eurozone has sufficient resources to more than cover its debts, were it to operate as a single state, and in fact, the level of debt to GDP for the Eurozone is lower than for other economies like the UK, US etc.

    If the political crisis in Europe were resolved, by the establishment of a single European state, then the resources required for investment in Greece could be mobilised very easily.

  3. The economic crisis in Greece which is a capitalist system not a post-Soviet one as neo-liberal economists have argued ceaselessly over the last decade, continues unabated with official unemployment rising on last count (nov 2013 28%). The tax war unleashed by the banks which have received E233 billion in tax bailouts on all home owners, farmers and small businessmen is such that a few million will now be on Inland revenues hit list with annual fines to be 100% from 15% that they once were. The prisons are already full and the state by not defaulting on its debts is forcing millions into …default.
    The Troika wants Greeks to act like Turkeys voting for Xmas. Short of massive electronic voting fraud which was evidenced in the last elections (2012) the ruling parties are going to be hammered into oblivion. It will be a miracle for PASOK to get over 3% and New Democracy is hovering around 10-12%% and taking into account that the last series of tax measures were against its own electoral base in the countryside, it will be a miracle if it polls so much anyhow. As for the splinter from Syriza Dem Left (Dimar) they will dissapear off the map completely. It took PASOK a little over two years to go from around 45% in the polls to 12%. New Democracy is starting from a lower base and by May 2014 it will be almost two years it has been in power.
    The contradictions of the crisis are such that bourgeois parties can no longer muster a vote by an electoral base they are destroying and every new ‘remedy’ just worsens the situation as Greece remaining in the EU-EZ may see 50-60% official unemployment so the idea that Greece didn’t leave the Euro is rather absurd as Greeks have left the Euro (when they have no source of income in Euros). Its rare for countries to leave the grip of the IMF without some form of rebellion and it appears this will be repeated in Greece…

  4. Boffy wrote:

    “Until the last year or so, most of the Eurozone was growing strongly”

    I don’t know where Boffy gets his information, and I’m beyond caring. Personally, I think he makes things up to suit whatever “let’s welcome capitalist growth” nonsense he happens to be flogging.

    However, the above claim by Mr. Boffy is so ridiculous that it represent, at best, cognitive dissonance.

    According tot the EU’s official statistical agency, Eurostat,
    annual percentage “growth” in GDP in the Euro area since 2008 has been -4.4% (2009); +2% (2010); +1.6% (2011); -0.7% (2012). Summing up the “growing strongly” has left the Euro area GDP 1.67% BELOW its 2008 level. That’s some strong growth, aint’ it?

    GDP isn’t a good measure? Want to try industrial production? Which for the euro area in 2013 was still about 10% below its previous “non-crisis/crisis” peak?

    Or investment rate of non-financial corporations in the euro area? OK, in 2012 that was about 16% below the rate of 2008.

    Or gross fixed capital formation? Down some 15%.

    With growth like that, who needs recession?

    And that bit about “trade surplus with China”?? That’s absolute nonsense. The EU has run a negate balance with China every year since 2003. The deficit has declined since 2008, but that’s because of the lack of growth, not because OF the growth.

    You can look all this stuff up on the Eurostat website. And it’s free.

  5. In Greece recovery arrived in 2013 according to bourgeois journalists of the corporate press. Every year growth is round the corner. We always turn the corner but never find growth. If one subtracts QE in the form of bank bailouts and bond purchases growth is there. It depends what one classifies as growth. More cars may be produced this year than before in a certain sense that is growth, but if they aint purchased or they are offerred on credit susbsidised by govts then is this …growth?

    In reality what is occurring is that bourgeois commentators create their own version of socialist realism but this time its capitalist realism. They speak growth, recovery, green shoots, boom just as previously they sold the line that the era of boom and bust was over.

    The creation of the Euro was a vehicle/mechanism of consolidating French-German imperialism and the periphery would be there to serve the centre, centralising all economic decisions and giving a competitive advantage via Brussels to the economic nationalist corporations of those two countries which would implement a beggar they neighbour approach. They would be the last ones standing even when all around fell into dust (as it has been happening).

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