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| August 2013
Austerity's Failure in Greece: Time to Think the Unthinkable
By C. J. Polychroniou
Truthout, August 7, 2013. All Rights Reserved.
Further austerity can only worsen Greece's economic plight, particularly already-catastrophic unemployment, warns Dimitri B. Papadimitriou, president of the Levy Economics Institute, according to the Institute's macro-economic model. But "unthinkable" economic policies—suggested by conservative and progressive economists alike—could.
In early 2010, Greece's staggering deficit/debt problems turned into a major financial crisis when its sovereign debt was downgraded by rating agencies into junk territory, freezing Greece out of international capital markets. On May of that year, Europe and the International Monetary Fund (IMF) agreed to a €110 billion financing plan for Greece, which involved major budget cuts, slashes in wages and pensions, sharp tax increases, labor market reforms and privatization of state assets—i.e., a financing plan with the usual neoliberal adjustment strings attached. The plan was such a flop that it led less than two years later to a second bailout program worth €130 billion, which included even harsher structural adjustment and austerity measures than the first loan agreement.
The primary aim of the first financial bailout of Greece was the repayment of loans, mainly to German and France banks, which were highly exposed to Greek sovereign debt. Today—and after a rather large haircut for private holders of Greek debt—most Greek public debt is held by the official sector—European Union (EU) government treasuries, the IMF, and the European Central Bank (ECB).
Greece's financial sovereignty is under the direct command of the troika of the European Commission, the IMF and the European Central Bank (ECB), and virtually all of the money received by Greece's international lenders and through the privatization of state assets and publicly owned enterprises goes toward the repayment of debt. In the meantime, the Greek economy and society are administered shock therapy of the kind described by Naomi Klein in her book The Shock Doctrine, with the explicit aim of institutionalizing an extreme neoliberal order. Already, Greek wages are being steadily reduced to 1970s levels (the actual intent is to bring Greek wages in line with those of other Balkan nations—i.e., Bulgaria, Romania); workers' rights have all but disappeared; social public services are being dismantled and the unemployment rate, currently at 27.4%, is the highest in the European Union. Amazingly enough, IMF, EU and Greek government officials treat these developments as evidence that the Greek program is on the right track—in fact, insisting on more austerity measures.
In the midst of this economic catastrophe, Greece is experiencing social decomposition not seen in Western societies since the end of the second world war—highlighted by the massive shrinkage of the middle class and the meteoric rise of the new poor—and a profound political crisis, underlined by the complete distrust exhibited by 90% of the population toward the government and the parliament (i.e., the political system as a whole). According to the same recent poll, 80% of the population mistrusts the European Union, while 68% brace themselves for worse days ahead. It is no surprise, therefore, that the sharpest rise of a neo-Nazi party in all of Europe is taking place today in Greece. Most of the support for Golden Dawn, a political party of thugs whose members do their best to imitate Hitler's "brown shirts," comes from unemployed and uneducated youth.
On the positive side, Greece's Coalition of the Radical Left (Syriza) has also surged in the polls, receiving in the last round of national elections, held in June 2012, nearly 27% of the popular vote, slightly less than three percentage points below the conservatives who came first. In the 2009 national elections, Syriza had managed to attract only 4.6% of the popular vote. However, in the event of a victory in the next elections, the challenges it faces are daunting: Will it form a government with the conservatives? If not, will it opt for political anarchy? Will it be able to secure the renegotiation of the loan terms with the troika, which has so far been its main strategy for dealing with the catastrophe of Greece? If not, will it force Greece out of the euro?
The international bailouts of Greece have been an unmitigated economic and social disaster, as a recently released econometric analysis of the Greek economic crisis by the Levy Economics Institute of Bard College attests, dispelling EU/IMF and Greek government officials' myths and lies about the alleged success of the Greek program. Even so, the options for the future of Greece remain starkly limited.
In an interview for Truthout, Dimitri B. Papadimitriou, president of the Levy Economics Institute of Bard College, executive vice president and Jerome Levy Professor of Economics at Bard, discusses with C. J. Polychroniou (a research associate and policy fellow at the Levy Institute and columnist for the Greek newspaper Eleftherotypia) the findings of the Institute's study on the Greek economic crisis and their implications for the future of Greece.
The Levy Economics Institute of Bard College has just published a major econometric analysis of the impact of "expansionary austerity" in Greece, with you as its lead author, which contradicts European Union (EU) and International Monetary Fund (IMF) claims that the experiment is producing positive results and actually makes a mockery of the Greek government's portrayal of the experiment as a "success story." How would you summarize the state of the Greek economy?
This is the sixth year of Greece's Great Depression, with an economy in free fall after the EU/IMF austerity kicked into effect as part of the May 2010 bailout agreement, a policy which not only continues unabated but insists on an even higher dosage of the same medicine when the patient's condition deteriorates. The Greek GDP shrank by almost 5% in 2010, by over 7% in 2011, by 6.5% in 2012, and it is expected to shrink by an additional 4.5-5% by the end of 2013. The country's unemployment rate hit double digits shortly after the austerity measures were implemented and is currently above 27%. As expected, poverty and inequality have skyrocketed during the last three and a half years, and suicides plague a nation that was traditionally immune to such phenomena. Moreover, in spite of all the sacrifices made by average Greek citizens who have seen their standard of living reduced to 1970s levels because of major cuts in wages, social benefits and pensions and sharp tax increases as part of the classic IMF structural adjustment program imposed by the country's international lenders and followed by the compliant Greek governments, the nation's debt has been steadily increasing and currently stands at 160.50% of the GDP even after a large "haircut" of sovereign debt held by the private sector took place in 2012.
In this context, it is simply mind boggling that anyone can possibly consider such outcomes as positive signs of an economic policy at work, let alone a "success story." But the dreadful economic and social trends we are witnessing are not surprising at all; on the contrary, they were long expected as consequences of discredited economic dogmas associated with neoliberalism. The simulations of the Levy Institute's specially constructed stock-flow macro-model show clearly that any fiscal consolidation during recessionary times does not result in a "success story" but, instead, in further economic decline.
The ongoing Greek catastrophe is so immense that it staggers the imagination. Reversing Greece's downward economic trend poses now severe policy challenges as the options have become truly narrow. In the course of three and a half years of wild neoliberal experimentation, Greece has been transformed from an advanced economy into an emerging economy on the verge of a humanitarian crisis.
Indeed, on what grounds then did the IMF and the EU expect austerity to work in the case of Greece, especially when the economy was already in a recession, and why don't they terminate this dangerous pursuit when all economic evidence is stacked against it?
Recent reports from the IMF reveal that concerns from employees of the Fund about the first bailout program succeeding were voiced in 2010. But it's obvious that they were ignored and, instead of doing the obvious, that is, providing Greece with a much larger bailout program and in the spirit of true assistance rather than in the spirit of punishment, they focused on saving large French and German banks from incurring big losses on their holdings of Greek sovereign debt and, in so doing, hoping to prevent erosion of investors' confidence and contagion for other Eurozone highly indebted countries like Spain and Italy.
Both the IMF and the EU produced rather optimistic scenarios about the effects of their policies on Greece, but all their projections were based on faulty evaluations of the country's public finances and erroneous estimates of the fiscal multipliers and their effect on austerity for an economy already in recession. However, despite the Fund's admission of big errors, both the IMF and the EU dismiss the need for either a revision or termination of the program, insisting dogmatically in turn that the program is "broadly correct." In the end, though, they will have to consider yet another debt restructuring before terminating the program, since the failure of the Greek program may seal the ultimate demise of the Fund and the dissolution of the Eurozone.
One of the major arguments often made by troika in defense of neoliberal economic reforms in Greece is that the nation's labor market is highly inflexible. How does one define inflexible labor markets, and do they actually exact a high economic toll as neoliberals claim that they do?
The word "inflexible" is cosmetic; it means workers should not be protected by strong unions with bargaining agreements covering wages and benefits, adhering to hiring and separation, and nondiscrimination clauses with recourse to state authority for noncompliance. The neoliberal doctrine makes no distinction between product and labor markets. But labor is not like rice where its price is bid up or pushed down dependent on supply and demand. In this line of thought, labor is simply a cost that can be cut and not an asset that can be developed. More and more evidence provides contrary results to those claimed by the neoliberal thinking.
Wages have been dramatically cut in Greece, yet the unemployment rate continues to rise. Who benefits from low-income workers?
Based on a Harmonized Competitiveness Indicator measuring unit labor costs, the relative Greek unit labor costs have decreased more than in any other Eurozone member country except for Germany, which systematically maintains lower values by severely suppressing wages. Despite the lower wages, unemployment is soaring because the country is in a deepening recession caused by the continuing and ever stronger grip of austerity that compresses both private and public consumption and investment. Under these circumstances, rising unemployment will further push wages downward - benefiting the private corporate sector, to be sure, much smaller now than its precrisis size. And as it has been widely reported, in Greece, many workers are either not "officially" employed, or paid regularly (in many private sector jobs workers are paid in small installments or are unpaid for several months) and/or have their social insurance contributions made on their behalf. Above all, the declining fortunes do not affect consumer prices that are continuously rising, pushing more and more people into deeper poverty.
Both the Greek government and the EU have shown remarkable indifference so far to the problem of unemployment in Greece, which, among other things, has led to the increasing strength of the neo-Nazi party "Golden Dawn." Why isn't anything being done to address the unemployment problem?
I don't think the Greek government is indifferent to the scourge of unemployment. But once you are forced to accept other people's money you have no choice but to abide with conditions placed from the lenders. Lenders are indifferent about lost output and unemployment, rising poverty and all other social and economic ills that come along. Where a government can be faulted is in its very poor negotiation skills with its lenders. The Greek governments clearly did not play their cards right against Berlin, Brussels and Frankfurt and Washington. The Greek governments can be blamed for continuously accepting even harsher austerity, pretending that ideological shifts are divorced from the economic conditions emanating from its very actions. The blame game is already a tired and unconvincing ploy.
The econometric analysis on the state of the Greek economy involves model simulations in order to assess the impact of austerity for the next three years. What should we expect if the current policies of austerity continue?
Our projections, which are derived from a stock-flow-consistent macroeconomic model especially constructed for Greece, show the faulty design of the troika program that yields inconsistent targets of deficit to GDP ratios, growth of GDP and unemployment. Our own simulations show that, should the agreed program of austerity continue unrevised, it will deliver a rising unemployment - reaching a high rate of 34% by the end of 2016, contradicting the troika's corresponding rate of slightly more than 20%. It is astonishing to think that even if their projections are correct - and there is plenty of evidence from their past four worsening revisions that they are not - that a higher than 20% unemployment should render the effort "successful."
Greek political life is undergoing profound changes, and the Coalition of the Radical Left (Syriza) has an historic opportunity to rise to power. What should it do in the event that it forms a government but fails to compel Greece's international lenders to put an end to the vicious austerity measures and the ongoing national catastrophe?
A progressive party like Syriza may have the unique opportunity by its sheer rise to power to engage in a different sort of negotiation. We should not forget that there is already a division in the house of troika. If Syriza were able to band with the other South European Eurozone members, this can become easier. Irrespective of this synergy, the division between the IMF and the European Commission can turn out to be advantageous to the strategy that Syriza has advocated: suspension of interest payments until growth emerges and then resumption of interest payments linked to GDP growth.
Furthermore, this will need to be supplemented with a higher allocation of structural funds with no matching contribution for a number of years. (More than 40 billion euros have been paid toward interest that can be refunded). This can be made possible only if the present government's pronouncements of achieving a primary budget balance are realized. If this is not achievable—most likely it is not—then the options are more or less of the unthinkable sort. This includes the introduction of a parallel national nonconvertible currency, including government tax-based bonds traded and used for payment of taxes at par. The parallel currency can start with government consumption expenditures including the instituting of a carefully designed and monitored guaranteed public service employment program as advocated by the late Hyman Minsky. The experience of such jobs programs is encouraging. Design, monitoring and evaluation of the program would be under the aegis of a central state authority with many regional branches along the lines of the successfully designed Americorps structure in the US. The parallel currency will eventually replace the euro for all internal transactions, but more importantly, as mentioned, it will not be convertible to the euro—avoiding speculative attacks. Even though this may sound like a radical idea, it has been suggested by many conservative and progressive economists alike.
Further austerity can only worsen Greece's economic plight, particularly already-catastrophic unemployment, warns Dimitri B. Papadimitriou, president of the Levy Economics Institute, according to the Institute's macro-economic model. But "unthinkable" economic policies—suggested by conservative and progressive economists alike—could.
In early 2010, Greece's staggering deficit/debt problems turned into a major financial crisis when its sovereign debt was downgraded by rating agencies into junk territory, freezing Greece out of international capital markets. On May of that year, Europe and the International Monetary Fund (IMF) agreed to a €110 billion financing plan for Greece, which involved major budget cuts, slashes in wages and pensions, sharp tax increases, labor market reforms and privatization of state assets—i.e., a financing plan with the usual neoliberal adjustment strings attached. The plan was such a flop that it led less than two years later to a second bailout program worth €130 billion, which included even harsher structural adjustment and austerity measures than the first loan agreement.
The primary aim of the first financial bailout of Greece was the repayment of loans, mainly to German and France banks, which were highly exposed to Greek sovereign debt. Today—and after a rather large haircut for private holders of Greek debt—most Greek public debt is held by the official sector—European Union (EU) government treasuries, the IMF, and the European Central Bank (ECB).
Greece's financial sovereignty is under the direct command of the troika of the European Commission, the IMF and the European Central Bank (ECB), and virtually all of the money received by Greece's international lenders and through the privatization of state assets and publicly owned enterprises goes toward the repayment of debt. In the meantime, the Greek economy and society are administered shock therapy of the kind described by Naomi Klein in her book The Shock Doctrine, with the explicit aim of institutionalizing an extreme neoliberal order. Already, Greek wages are being steadily reduced to 1970s levels (the actual intent is to bring Greek wages in line with those of other Balkan nations—i.e., Bulgaria, Romania); workers' rights have all but disappeared; social public services are being dismantled and the unemployment rate, currently at 27.4%, is the highest in the European Union. Amazingly enough, IMF, EU and Greek government officials treat these developments as evidence that the Greek program is on the right track—in fact, insisting on more austerity measures.
In the midst of this economic catastrophe, Greece is experiencing social decomposition not seen in Western societies since the end of the second world war—highlighted by the massive shrinkage of the middle class and the meteoric rise of the new poor—and a profound political crisis, underlined by the complete distrust exhibited by 90% of the population toward the government and the parliament (i.e., the political system as a whole). According to the same recent poll, 80% of the population mistrusts the European Union, while 68% brace themselves for worse days ahead. It is no surprise, therefore, that the sharpest rise of a neo-Nazi party in all of Europe is taking place today in Greece. Most of the support for Golden Dawn, a political party of thugs whose members do their best to imitate Hitler's "brown shirts," comes from unemployed and uneducated youth.
On the positive side, Greece's Coalition of the Radical Left (Syriza) has also surged in the polls, receiving in the last round of national elections, held in June 2012, nearly 27% of the popular vote, slightly less than three percentage points below the conservatives who came first. In the 2009 national elections, Syriza had managed to attract only 4.6% of the popular vote. However, in the event of a victory in the next elections, the challenges it faces are daunting: Will it form a government with the conservatives? If not, will it opt for political anarchy? Will it be able to secure the renegotiation of the loan terms with the troika, which has so far been its main strategy for dealing with the catastrophe of Greece? If not, will it force Greece out of the euro?
The international bailouts of Greece have been an unmitigated economic and social disaster, as a recently released econometric analysis of the Greek economic crisis by the Levy Economics Institute of Bard College attests, dispelling EU/IMF and Greek government officials' myths and lies about the alleged success of the Greek program. Even so, the options for the future of Greece remain starkly limited.
In an interview for Truthout, Dimitri B. Papadimitriou, president of the Levy Economics Institute of Bard College, executive vice president and Jerome Levy Professor of Economics at Bard, discusses with C. J. Polychroniou (a research associate and policy fellow at the Levy Institute and columnist for the Greek newspaper Eleftherotypia) the findings of the Institute's study on the Greek economic crisis and their implications for the future of Greece.
The Levy Economics Institute of Bard College has just published a major econometric analysis of the impact of "expansionary austerity" in Greece, with you as its lead author, which contradicts European Union (EU) and International Monetary Fund (IMF) claims that the experiment is producing positive results and actually makes a mockery of the Greek government's portrayal of the experiment as a "success story." How would you summarize the state of the Greek economy?
This is the sixth year of Greece's Great Depression, with an economy in free fall after the EU/IMF austerity kicked into effect as part of the May 2010 bailout agreement, a policy which not only continues unabated but insists on an even higher dosage of the same medicine when the patient's condition deteriorates. The Greek GDP shrank by almost 5% in 2010, by over 7% in 2011, by 6.5% in 2012, and it is expected to shrink by an additional 4.5-5% by the end of 2013. The country's unemployment rate hit double digits shortly after the austerity measures were implemented and is currently above 27%. As expected, poverty and inequality have skyrocketed during the last three and a half years, and suicides plague a nation that was traditionally immune to such phenomena. Moreover, in spite of all the sacrifices made by average Greek citizens who have seen their standard of living reduced to 1970s levels because of major cuts in wages, social benefits and pensions and sharp tax increases as part of the classic IMF structural adjustment program imposed by the country's international lenders and followed by the compliant Greek governments, the nation's debt has been steadily increasing and currently stands at 160.50% of the GDP even after a large "haircut" of sovereign debt held by the private sector took place in 2012.
In this context, it is simply mind boggling that anyone can possibly consider such outcomes as positive signs of an economic policy at work, let alone a "success story." But the dreadful economic and social trends we are witnessing are not surprising at all; on the contrary, they were long expected as consequences of discredited economic dogmas associated with neoliberalism. The simulations of the Levy Institute's specially constructed stock-flow macro-model show clearly that any fiscal consolidation during recessionary times does not result in a "success story" but, instead, in further economic decline.
The ongoing Greek catastrophe is so immense that it staggers the imagination. Reversing Greece's downward economic trend poses now severe policy challenges as the options have become truly narrow. In the course of three and a half years of wild neoliberal experimentation, Greece has been transformed from an advanced economy into an emerging economy on the verge of a humanitarian crisis.
Indeed, on what grounds then did the IMF and the EU expect austerity to work in the case of Greece, especially when the economy was already in a recession, and why don't they terminate this dangerous pursuit when all economic evidence is stacked against it?
Recent reports from the IMF reveal that concerns from employees of the Fund about the first bailout program succeeding were voiced in 2010. But it's obvious that they were ignored and, instead of doing the obvious, that is, providing Greece with a much larger bailout program and in the spirit of true assistance rather than in the spirit of punishment, they focused on saving large French and German banks from incurring big losses on their holdings of Greek sovereign debt and, in so doing, hoping to prevent erosion of investors' confidence and contagion for other Eurozone highly indebted countries like Spain and Italy.
Both the IMF and the EU produced rather optimistic scenarios about the effects of their policies on Greece, but all their projections were based on faulty evaluations of the country's public finances and erroneous estimates of the fiscal multipliers and their effect on austerity for an economy already in recession. However, despite the Fund's admission of big errors, both the IMF and the EU dismiss the need for either a revision or termination of the program, insisting dogmatically in turn that the program is "broadly correct." In the end, though, they will have to consider yet another debt restructuring before terminating the program, since the failure of the Greek program may seal the ultimate demise of the Fund and the dissolution of the Eurozone.
One of the major arguments often made by troika in defense of neoliberal economic reforms in Greece is that the nation's labor market is highly inflexible. How does one define inflexible labor markets, and do they actually exact a high economic toll as neoliberals claim that they do?
The word "inflexible" is cosmetic; it means workers should not be protected by strong unions with bargaining agreements covering wages and benefits, adhering to hiring and separation, and nondiscrimination clauses with recourse to state authority for noncompliance. The neoliberal doctrine makes no distinction between product and labor markets. But labor is not like rice where its price is bid up or pushed down dependent on supply and demand. In this line of thought, labor is simply a cost that can be cut and not an asset that can be developed. More and more evidence provides contrary results to those claimed by the neoliberal thinking.
Wages have been dramatically cut in Greece, yet the unemployment rate continues to rise. Who benefits from low-income workers?
Based on a Harmonized Competitiveness Indicator measuring unit labor costs, the relative Greek unit labor costs have decreased more than in any other Eurozone member country except for Germany, which systematically maintains lower values by severely suppressing wages. Despite the lower wages, unemployment is soaring because the country is in a deepening recession caused by the continuing and ever stronger grip of austerity that compresses both private and public consumption and investment. Under these circumstances, rising unemployment will further push wages downward - benefiting the private corporate sector, to be sure, much smaller now than its precrisis size. And as it has been widely reported, in Greece, many workers are either not "officially" employed, or paid regularly (in many private sector jobs workers are paid in small installments or are unpaid for several months) and/or have their social insurance contributions made on their behalf. Above all, the declining fortunes do not affect consumer prices that are continuously rising, pushing more and more people into deeper poverty.
Both the Greek government and the EU have shown remarkable indifference so far to the problem of unemployment in Greece, which, among other things, has led to the increasing strength of the neo-Nazi party "Golden Dawn." Why isn't anything being done to address the unemployment problem?
I don't think the Greek government is indifferent to the scourge of unemployment. But once you are forced to accept other people's money you have no choice but to abide with conditions placed from the lenders. Lenders are indifferent about lost output and unemployment, rising poverty and all other social and economic ills that come along. Where a government can be faulted is in its very poor negotiation skills with its lenders. The Greek governments clearly did not play their cards right against Berlin, Brussels and Frankfurt and Washington. The Greek governments can be blamed for continuously accepting even harsher austerity, pretending that ideological shifts are divorced from the economic conditions emanating from its very actions. The blame game is already a tired and unconvincing ploy.
The econometric analysis on the state of the Greek economy involves model simulations in order to assess the impact of austerity for the next three years. What should we expect if the current policies of austerity continue?
Our projections, which are derived from a stock-flow-consistent macroeconomic model especially constructed for Greece, show the faulty design of the troika program that yields inconsistent targets of deficit to GDP ratios, growth of GDP and unemployment. Our own simulations show that, should the agreed program of austerity continue unrevised, it will deliver a rising unemployment - reaching a high rate of 34% by the end of 2016, contradicting the troika's corresponding rate of slightly more than 20%. It is astonishing to think that even if their projections are correct - and there is plenty of evidence from their past four worsening revisions that they are not - that a higher than 20% unemployment should render the effort "successful."
Greek political life is undergoing profound changes, and the Coalition of the Radical Left (Syriza) has an historic opportunity to rise to power. What should it do in the event that it forms a government but fails to compel Greece's international lenders to put an end to the vicious austerity measures and the ongoing national catastrophe?
A progressive party like Syriza may have the unique opportunity by its sheer rise to power to engage in a different sort of negotiation. We should not forget that there is already a division in the house of troika. If Syriza were able to band with the other South European Eurozone members, this can become easier. Irrespective of this synergy, the division between the IMF and the European Commission can turn out to be advantageous to the strategy that Syriza has advocated: suspension of interest payments until growth emerges and then resumption of interest payments linked to GDP growth.
Furthermore, this will need to be supplemented with a higher allocation of structural funds with no matching contribution for a number of years. (More than 40 billion euros have been paid toward interest that can be refunded). This can be made possible only if the present government's pronouncements of achieving a primary budget balance are realized. If this is not achievable—most likely it is not—then the options are more or less of the unthinkable sort. This includes the introduction of a parallel national nonconvertible currency, including government tax-based bonds traded and used for payment of taxes at par. The parallel currency can start with government consumption expenditures including the instituting of a carefully designed and monitored guaranteed public service employment program as advocated by the late Hyman Minsky. The experience of such jobs programs is encouraging. Design, monitoring and evaluation of the program would be under the aegis of a central state authority with many regional branches along the lines of the successfully designed Americorps structure in the US. The parallel currency will eventually replace the euro for all internal transactions, but more importantly, as mentioned, it will not be convertible to the euro—avoiding speculative attacks. Even though this may sound like a radical idea, it has been suggested by many conservative and progressive economists alike.
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