Tuesday, 7 July 2015

Economics 101: Greece and the Financial Crisis

A friend asked me to explain what's happening in Greece "in a nutshell"...So as a more practical follow-up to my previous post on this blog, here is a slightly edited version of what I wrote to her, in case anyone else needs a primer (pretty accurate nutshell summary I think) -

In a nutshell? How about, an epic struggle between inhuman, irrational, world-destroying neoliberal capitalism and an authentic, democratic politics of hope? I don't know how much you know, but it all goes back to the 2008 financial crisis and the subprime mortgages in the U.S., which caused the Great Recession. Greece, like other European countries, had a lot of debt, due to years of mismanagement by corrupt governments backed by equally corrupt French and German banks. But what made things worse was that, in order to keep the government budget deficit within eurozone limits (to be able to join the euro currency), starting in the 1990s Goldman Sachs helped them 'cook the books' by hiding part of their debt. Keeping the debt off the books basically allowed them to keep borrowing without growing the budget deficit. When a new government was elected in 2010, they revealed this hidden debt, and revised deficit figures - the budget deficit effectively skyrocketed from around 6% to 15% of GDP overnight. As this meant that any further borrowing (and financing the government) was going to be very difficult, Greece was about to default on its debt. So in 2010 the Troika of creditors - the European Central Bank, the IMF and Eurozone countries (represented by the European Commission) - loaned all this money to Greece, in order to help them keep paying their debt - but most of the bailout money went right back into French and German banks in the form of loan payments, not into the Greek economy. And in return for those loans, the creditors demanded 'austerity' cuts from Greece, which were ostensibly meant to bring the deficit back down and make Greece's economy more efficient, but in reality (as many economists predicted) caused an even deeper recession because it reduced the amount of money going into the economy and therefore the amount of revenue (due to pension cuts, lowered wages, unemployment due to public sector job losses, etc), which led to three general trends:

1. more debt for Greece to repay
2. less revenue/income for repaying that debt
3. even less growth, income, productivity, deeper recession, etc

Greece effectively merely functioned as a conduit for European taxpayers' money to be funneled into French and German banks, who were the real target of the bailout. From the viewpoint of sound economics, this is either a colossal policy failure on the part of the EU and Troika, or a cynical conspiracy against the public on an equally colossal scale. It's kind of like if I were to lend you a bunch of money so that you can keep making interest payments on your debt to my friend Jeremy, but in return I demanded that you close your small business selling oysters because you're spending too much money on it (in my opinion), and take a minimum-wage job instead, and use most of the money I gave you to pay Jeremy - meaning you now owe more money (to me and Jeremy) and have less income from which to repay it - and less opportunity for growth and financial stability/sustainability.

What's happening now is that the creditors - Eurozone leaders, ECB and IMF - are essentially demanding that Greece continue in more-less the same fashion as it has for the past 5 years, and even implement further austerity cuts - against the advice of virtually every credible economist in the world - in exchange for further loans/credit from the creditors. The Greeks, who a few months ago elected a left-wing anti-austerity government unconnected to the previous corruption, are saying no - we need to grow our economy, we need debt relief (i.e. part of the debt to be forgiven), job creation, we need to get on a sustainable path that will allow us to actually repay our debt, which means stimulus spending, not further cuts... The irony is that back in 2012, there was a leaked report suggesting that the Troika's own internal review believed that “even under the most optimistic scenario, the austerity measures being imposed on Athens risk a recession so deep that Greece will not be able to climb out of the debt hole.”

Since they couldn't come to an agreement, the current programme expired, and Greece was about to default on its debt again as the ECB refused to provide emergency funding to Greek banks - and they cannot print their own money (in euros), being part of the common currency - some of the creditors were insisting that if the Greeks reject the bailout terms (further austerity cuts with no debt relief) in the referendum, they would have to leave the Euro (currency), meaning start printing their own money, or drachmas, which was the Greek currency before they joined the euro.

Bear in mind also that in both Europe and the US, it wasn't just struggling economies but the banks themselves - the ones who caused the global crisis in the first place - that were bailed out with taxpayers' money...But no structural reforms or 'austerity' cuts were demanded of the banks in exchange for those bailouts, which in some cases were even greater than the bailouts received by Greece or Ireland, amounting to trillions of dollars. In one notable case, AIG executives were reported to have received bonuses of up to a million dollars (per head) a year or two after the bailouts, taxpayer-funded...

Varoufakis, the controversial but in my view awesomely cool former Greek finance minister (he resigned right after the referendum as a tactical move), explaining some of the issues:

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