By Kumar David –

Prof. Kumar David

Things will change in Europe but the Euro will survive

It is unlikely but not impossible that Greece will be forced out of the Eurozone. The Syriza government wants to avoid a painful “Greexit” and European and German capitalism does not want a shake up endangering the foundations of the Euro. Most likely is a game of brinkmanship with both sides compromising at the eleventh-hour. Syriza and its leader Alexis Tsipras, however, cannot retreat on two matters, there has to be some relief on life and limb crushing austerity, and secondly a part of the proposed privatisation package will have to be shelved. The big threat facing European capitalism is that if Spain follows Greece electing the similar-to-Syriza left-populist Podemos alliance at the next election the entire Eurozone will unravel. Recall also that the anti-Euro rightwing is gaining ground in many European countries, notably France. There is no mechanism to exit the Euro as such an eventuality was not imagined; the messy exit of two countries followed by unravelling of the Euro will create a global financial catastrophe on the scale of the 2008 melt down of the American financial economy.

The blame game ‘Who should be hanged from a lamppost for the catastrophe in Greece’ cannot be dodged. Yes it is true that the people were living beyond their means, meaning the government was running a huge deficit from the early 1990s when the deficit graph in the accompanying chart shoots up. The deficit before that is not shown in the chart. In 2000 it passed the 40% of GDP mark and in 2009 reached 95%. It could be argued that this was because benefits and wages were too high in relation to productivity and output. This however would be less than half the story. The main reason for skyrocketing Greek public and private debt and astronomical fiscal deficit was that the country’s banks and financial institutions were networked into financial transactions of trans-European capital in a style that can only be described as a scam. There was rampant corruption in banking and financial institutions, German banks lent recklessly and Russian and other dicey money was laundered through Greek institutions.

That was till the bubble burst after the US catastrophe. Greek public and bank bond yields reached the sky (high bond yield means lenders demand astronomical returns because they perceive highly risky borrowers). State and banks was unable to pay debts or borrow afresh to make payments. This means sovereign default and banks declaring bankruptcy; total meltdown. It was at this juncture that European and global capitalism stepped in to avert catastrophe since the contagion would have spread to Spain, Portugal, Italy and even France. The whip was in the hand of German capitalism and Angela Merkel but the active implementation mechanism was the so-called Trioka (the European Commission, European Central Bank and the IMF). I will not detail the stages in the bailout which included loans (about Euro 240 billion in total), ‘haircuts’ (writing off some debt), privatisation plans to recapitalise the broke government, and harsh austerity through cuts in expenditure. Austerity was so severe that unemployment rose to 25%, living standards took a tumble and the suicide rate crept up. Three years of this and people revolted and voted in Syriza on a “no extreme austerity; no privatisation; write off some debt” programme. That is where we are now. Both sides are talking tough but both will be forced to retreat.

The blame game

Some say the Greek people are to blame because they sat on their posteriors and enjoyed a good life subsidised by corrupt and irresponsible European and global capitalism till their rumps got roasted. The left blames capitalism for using Greece as a laundering pad for dirty or risky deals until the dam burst in the citadels New York, London and Tokyo. To help understand the storyline let me construct a hypothetical analogy. Say the previous Lankan government borrowed $500 million from Chinese sources for a range of infrastructure projects. And assume that, as alleged, a large proportion, say one-third, of this was graft (if you are a fan of the defeated regime take this as an example for illustrative purposes only). Since some highway projects cost seven times that of similar projects implemented just five years previously one-third may be a gross underestimate.

Chart of Greek GDP and Debt since 1970 and Deficit since 2000 in current Euros.
(Drawn by I. Thanatos from data time series of C.M. Reinhart, World Bank and Eurostat) (http://en.wikipedia.org/wiki/Greek_government-debt_crisis)

This sort of thing cannot be done without the complicity of Chinese project companies which, hypothetically, made huge deposits in the bank accounts of Lankan leaders in say the Seychelles, while at the same time stashing goodly amounts in their bosses’ accounts in say Macau. Say also that a company called China Ports & Harbours released Rs 25 million a day in gunny bags of cold hard cash on authorised company cheques of its account with Standing Chacha Bank during the election period saying the money was going to Temple Trees. Have no doubt, all this, whether stashed away in the Seychelles, deposited in the accounts of company directors in Macau, or released for nefarious election time activities, will, by creative accounting, be shown on the expenses side of project accounts to be repaid by your children.

The moral question is this: Are the people of Sri Lanka, your children and their children, obliged to service this graft – that is repay project ‘costs’ and interest thereon? Legally maybe, morally surely not. To what extent are the people of Greece obliged to pay the price of systemic manipulation by finance capital by suffering harrowing austerity? And similarly when the chickens come home to roost, will the people of Lanka have to pay for white elephants like Mattala, the stadium in the middle of nowhere, the Lotus Bowl, highways paved with gilt tags and also for the rake-off of agents in the donor country China?

Though not as blatant as mass corruption now grabbing headlines in Sri Lanka (where were all these newspaper editors these last four years when a few people were screaming their heads off?), what happened in Greece is morally equivalent to this hypothetical or not so hypothetical Lankan story. The sums involved in the Greek case are larger but graft accounted for a smaller portion than unwarranted, risky and irresponsible financial activities of European banks and private finance capital from 1990 to 2008. There are also two more analogies. We can imagine the permit that European capital gave Greek governments to run huge fiscal deficits till 2010 as similar to the short-term benefits that infrastructure squandering and graft induced liquidity, injected into Lanka in the last several years. Like the proverbial crab we danced while the water was warming. Secondly, money was robbed not only at the very top but also by contractors and materials suppliers all along the project and supply chain. This is similar to the killing made by individual Greek financiers and bankers during the golden harvest before the crash.

Adjustments in Europe

I will wind up by explaining the reason for the anger of the Greek people. The Troika and German finance capital and government, the heavyweights standing behind it, for this reason, will be forced to make concessions. Radical economist Nouriel Roubini explains it like this (I have simplified the economic jargon):

“A myth is developing that private creditors have accepted significant losses in the restructuring of Greece’s debt, while the official sector got off scot free. The reality is that private creditors got a very sweet deal while actual and future losses have been transferred to taxpayers. Gains in good times were privatised while losses have been socialised. Taxpayers, not private bondholders will end up paying for the losses from Greece’s past, current and future insolvency.

“A ‘haircut’ of €110bn on privately held bonds is matched by an increase of €130bn in Greece debt to official European creditors (ECB etc). But crucially, a significant part of this increase in Greece’s official debt goes to bail out private creditors: €30bn for upfront cash sweeteners on the new bonds. Loans of at least €25bn from the European Financial Stability Facility (EFSF) to the Greek government will go towards recapitalising banks in a scheme that will keep those banks in private hands and allow shareholders to buy back public capital injection. Furthermotre new bonds will be subject to English law, while old bonds fell under Greek jurisdiction. So if Greece were to leave the Eurozone, it could no longer pass legislation to convert euro-denominated debt into new-drachma (Greek currency) debt. This is an amazing sweetener for creditors”. 

In effect the EFSF has “lent” money to Greece, but actually used it to pay off the debts of Greek banks; that is to reimburse German capitalists. The burden of “loan” repayment falls on Greece (Greek people). Greek banks went bust because of the folly of Greek finance capital; the people now bear the brunt of bailing them out through the circuitous mechanism of the EFSF. How is Greece to service the burden – austerity, cut consumption, cut welfare and pensions and sell the family silver (privatise state owned assets). The “loan”, the German taxpayer’s money, goes up front not to Greece but to reimburse the holders of bankrupt Greek bank bonds; that is German finance capital and bond holders.

This cock simply will fight and Merkel and the German government know it. They will agree to further credits for Greece while swallowing reduction in austerity measures, that is higher budget expenditure, and agreeing to shelve some of the privatisation. Tsipras and Syriza for their part will have to retain a degree of belt tightening and will have to ensure that the economic recovery that commenced last year is sustained.