The adjustment program will deepen the already incredibly prolonged and severe collapse of the Greek economy. Worse, these consequences, which will result in the misery of millions, are not completely unintended
The results of the new Greek bailout announced Sunday should not be a surprise. The program requires tax increases, pension cuts, weakening of collective bargaining clauses, and “ambitious” primary surplus targets, which would require € 13 billion in spending cuts, in exchange for € 50 billion to avert default and the collapse of banks. The adjustment program will deepen the already incredibly prolonged and severe collapse of the Greek economy. It implements a draconian fiscal adjustment, that has utterly and visibly failed, and that was overwhelmingly rejected by the Greek people in a referendum last week. In many ways Prime Minister Alexis Tsipras and Syriza had an impossible mandate, to remain in the Eurozone, and to deflect the austerity policies that are the only solution accepted by the Troika – the European Commission, the European Central Bank, and the International Monetary Fund.
Also, the proposed program is not the end of the story. It is unclear that the new agreement would pass in the Greek parliament, and it seems that several members of Tsipras’s party will vote against it. Left Platform, a subgroup of Syriza, would most likely vote against it. If the bailout is approved, which seems probable, it will be with the support of the traditional parties and ultimately with those that supported the Yes vote in the referendum. In that sense, those that suggest the bailout was a coup d’état, and that it undermined democracy are on the right track.
Of course the Eurozone and the economic institutions that constitute it were not designed to be democratic and never where supposed to bend to the will of the people. It is important to remember that while the European Union started by combining particular markets – the European Coal and Steel Community, whose members would pool coal and steel production – and was a project of the essentially socially-democratic Left that understood the lessons of the inter-war period and of the failed Versailles Treaty, the euro is the child of the neoliberal Maastricht Treaty.
While the United States was an unlikely ally, and even supported the socialist views of its European partners in the 1950s and 1960s, in the context of the Cold War, that was not the case in the 1990s, when the euro and the institutions around it were designed. By then, after the Soviet collapse, the pro-market, minimal government, conservative view of the world was dominant, and austerity was seen as pre-requisite to prosperity, or at least to the enrichment of a few. Even in the US, Bill Clinton and the Democrats officially suggested that fiscal adjustment and the downsizing of the welfare state, the true nature of reforms, were essential for growth.
My hope right after the referendum was not for a generous bailout that would promote a real recovery, fast growth and full employment, but simply for the abandonment of the harsher austerity measures, and perhaps, the beginning of the recognition that Eurozone institutions needed to be reformed. Debt relief and development funds were a chimera. If anything, what was surprising was pace at which Tsipras seems to caved to the demands of the European overlords, sacrificing his finance minister Yannis Varoufakis, and accepting a bailout that is harsher than the one that was refused before and led to the referendum.
Perhaps Tsipras believed that the threat of exit (Grexit) was not credible, and that even with the No vote behind him his weak hand was evident. As I hinted before, the real threat was expulsion (Grexpulsion), and faced with the dire consequences of being expelled, he decided that there was no way out but to surrender to the Troika’s punitive conditions, a new Versailles Treaty, as Varoufakis has referred to the new bailout. In this interpretation, supported by Leo Panitch and Sam Gindin, for example, Syriza had no room for manoeuvring. This view is firmly based on the notion that an exit from the euro will not solve all the problems. As I noted before, devaluation only solves the difficulties if, with the new currency, the government can go in for an expansionary fiscal policy without leading to trade deficits.
Expansionary fiscal policy, which is what Greece needs, would lead to an expansion of consumption that has been repressed for six years now, and to an import boom. Consequently, a recreated and devalued drachma would have to stimulate exports to pay for the import expansion. In order to adjust its external accounts so far, without devaluation, Greece was forced to do internal devaluation, meaning reducing wages to increase its competitiveness. According to the ILO, real wages collapsed by 24 per cent in Greece from 2009 to 2013. And the evidence seems to indicate that the actual adjustment occurred not because lower wages led to increasing exports, but because the recession led to a collapse of imports. So there is little hope that, at least in the short run, an exit (or expulsion) from the euro would solve the Greek crisis.
Perhaps what is more difficult to understand – and what is truly puzzling, particularly for progressive analysts – is that the European Commission policies are irrational and seem to undermine the very basis of the euro, and conceivably the European project itself, as Paul Krugman has suggested. Krugman adds that the destruction of the European project is not Greece’s fault. However, this view seems to assume that the European project is still the old social-democratic project of the Treaty of Rome, the one that was designed with the failures of the inter-war period and the European Civil War, as Keynes referred to the Great War, in mind, and that was acceptable to the United States in the context of the Soviet menace. The actual project being defended by the European Commission today is the other one – the neoliberal project – and it is doing just fine.
As noted by Stavros Mavroudeas, just before the referendum, the Yes/No divide in Greece was largely based on class distinctions. Yes, unemployment is incredibly high in Greece, and the continuous economic stagnation has a steep social cost. But the elites and a significant proportion of the middle-class are relatively unaffected. The same is true in the other Eurozone countries, where class coalitions imply that the much narrower and miserly European project – the one launched by the Maastricht Treaty – has significant public support.
Way back in 1943, Michael Kalecki, the Polish economist who independently developed Keynesian ideas in the 1930s, said that the “social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the state of confidence.” Markets would require austerity and high unemployment to keep workers in line. He noted that business elites, which is true of the Greek, and German and French elites (and others too, including the elites in the US that has, through the IMF, underwritten all agreements), abhor public spending to promote mass consumption. The European project is fine actually, and the Greek elites are as responsible as the German elites for the terrible consequences it has had so far. Worse, these consequences, which result in the misery of millions, are not completely unintended.
Matías Vernengo is Professor, Bucknell University