To continue this morning's macroeconomic and foreign focus, I share here (with permission) the macroeconomic briefing written by James Meadway of the New Economics Foundation for NEON (the New Economics Organisers' Network) that was published yesterday. His focus was Greece, and the impact that the forthcoming general election may have there on financial stability within that country and beyond. The financial markets are terrified of instability resulting from election of a left wing government. The reality may be is that such a government could create the tipping point that breaks the Eurozone out of the paralysis that is gripping it.
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MACROECONOMIC BRIEFING
SUMMARY: The sudden possibility of early elections in Greece has raised the prospect of an outright election victory by Syriza. Europe's financial markets have been thrown into turmoil at the result. The stakes have been raised massively: Syriza have repeatedly said they will not honour Greece's illegitimate debts and will end the harsh austerity measures, but Europe's leadership is still insisting they must be met.
- The announcement on Tuesday last week that Greek Prime Minister Samaras is to call early elections for the Greek Presidency has caused turmoil this week. Should Parliament fail to elect a new President, in three rounds of votes, Greece will go to the polls early in the New Year. Syriza, the “Coalition of the Radical Left”, is currently ahead in the opinion polls and most likely to form the next government.
- The Greek stock market fell 12% on the news, the biggest single-day fall since the global market crash of late 1987. The interest rate on Greek government bonds, reflecting the fears of potential lenders, rose to its highest level in two years. Stock markets across Europe, including London, have been jittery all week partly as a result, with the biggest drop in London share prices for three years.
- Syriza, meanwhile, has been attempting a charm offensive on Europe's financiers. They were seemingly more offended than charmed, with an (alleged) email leaked from $1tr investment fund Capital Group after meeting Syriza representatives in London describing their plans as “worse than communism”.
- They may have a point - Communists tried to pay their debts. Poland introduced austerity measures in 1980 to meet the costs of its $24bn external debt, leading to the formation of the Solidarnosc trade union, the 1981 imposition of martial law and, ultimately, the fall of the regime. Yugoslavia's $21bn foreign debt was renegotiated through the International Monetary Fund (IMF) in 1982, who imposed austerity. Nationalists adroitly exploited the economic crisis that ensued, pushing the country towards eventual civil war.
- When Yugoslavia fell apart in the 1990s, Greek capital moved in swiftly. Greek investment (FDI) in the Balkans is now around $10.9bn, or about 6% of all Balkan FDI, second only to Austria, but it is in banking that Greek capital has the most significant presence. Greek-owned banks are four of the ten largest in Bulgaria, three of the top ten in Serbia, and two of the top ten in Romania. Bulgaria already suffered a bank run over the summer on KTB bank, one of its largest, leading to the collapse of its government. Romania's banking system is currently under European Central Bank (ECB) supervision.
- The relationship between Greek and Balkan banks is like a mini-me version of the relationship French and German banks have to southern Europe - including Greece. Right up to the crash, and beyond, German and (especially) French banks were happy to lend money to the Greek government in the belief that no eurozone member would be allowed to default. When that became obviously untrue, following Greek elections in late 2009, the euro debt crisis erupted.
- Since then, Greece has undergone the most stringent austerity programme of any high-income country, totalling cuts of 41bn euros. Public healthcare spending has been cut by 40%. Unemployment is still over 25%, and as high as 58% for those under 25. The economy is 25% smaller than it was four years ago, and feeble growth this year doing little to reverse the decline. The real pay for those in work, after taxes and inflation, has fallen by around 50%.
- These drastic austerity measures were in return for loans totalling 245bn euros. These have ensured Greece's creditors kept on being paid, with Greek sovereign debt totalling 318bn euros, or 175% of GDP. Its creditors are mainly other institutions in Europe, the bailout package having transferred Greece's debt from private hands (principally French and German banks) to official, like the ECB. Around 85% of Greek sovereign debt is now owed to the “official sector”. Substantial payments on this debt are due to the ECB over the next year, including on 38bn euros that was loaned to support the banking system.
- Syriza leader Alexis Tsipras has repeatedly said he will refuse to meet such demands for repayments. Syriza's alternative plan for the debt is in three parts:
o a European conference on debt, modelled on the 1953 London conference that cut Germany's debt;
o major cuts to debt owing to the official sector, reducing the total Greek sovereign debt to a sustainable level;
o linking interest payments on the remaining debt to GDP growth (thus resurrecting an idea of Keynes').
- Meanwhile, Syriza's rescue plan for Greek society includes:
o ending the “Memorandum of Understanding” between the Greek state and EU/ECB/IMF “Troika” under which draconian austerity has been imposed;
o provision of free food, health care, shelter, electricity and water to all those in need;
o plans to lift the minimum wage 750 euros/month (up from 450/euros), up from 551 euros/month;
o same minimum income for pensioners;
o income taxes will be cut for all but the wealthy, who will face a clampdown on avoidance expected to bring in 70bn euros;
o the re-establishment of collective bargaining in the workplace - abolished in 2012;
o a massive, publicly-funded, job creation programme.
- These measures will be expensive, but Syriza's leadership appear to be pinning their hopes on a return to rapid growth, increased tax collection, massively reduced debt payments and finally direct assistance from the EU institutions. For this to work, it will be necessary persuade Europe's leadership that the costs of a managed write-off of Greek debt, and possibly a ”European New Deal” to reconstruct the country and others in southern Europe, will be less than an uncontrolled default and exit from the euro.
- There are some indications that Germany's political leadership are inclined to reach a compromise, viewing the costs of (in effect) paying Greece to shut up as less than the costs of the euro's disintegration. The ECB has softened its hard line, adopted under former President Trichet from 2009-12, in favour of easing monetary conditions — making it easier for banks to lend. This did not stop them threatening Cyprus with being pushed out of the eurozone in 2013, however.
- If Greece is granted any leeway, with anti-austerity Podemos also leading the polls in Spain the potential for such demands spreading across southern Europe is high. More likely, for now, will be a continuation of the pressure applied most recently by EU Commission chief Jean-Claude Juncker, describing Syriza as “extreme forces” and warning Greeks not to deliver “the wrong election result”. The EU and ECB believe that the threat of Greece being thrown out of the euro can be used, as it has in the past, to discipline any future government there to keep to the Memorandum.
- Economics is about choices, and developments in Greece further emphasise that there are real alternatives to business as usual. The wide-ranging, fundamental economic debates in Spain and Greece can only be a good thing for democracy in Europe.
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So, we and Greece are warned about “extreme forces” and even more disgracefully about “the wrong election result”!!??
Reminds me of the death of Charles ll, whom the quacks subjected to extreme “medical” bleeding, and when that didn’t work, they bled him some more, leading the poor chap to exclaim “I fear, gentlemen, I am an unconscionable time a’dying”, and shortly after expired.
Syriza’s strategy is so clearly correct, standing in sharp contrast to the buffoonery of the leaders of the whole Eurozone experiment, who have consistently looked left and right and STILL stepped out into the ongoing traffic, duly getting knocked down. Who was it -Einstein? – who said the definition of madness was to keep on doing the same thing, and expect to get a different result? The Greek and Spanish stories are clear evidence that the Eurozone experiment needed to be radically overhauled, if not completely re-cast, which is why Syriza and Podemos have such traction with the voters, who, like Charles all, know the quacks are not only not helping, they’re actually making things worse. The choice, despite ludicrous warnings about “worse than Communism” is actually between Syriza and Podemos style solutions and massive civil disobedience and unrest, if not real revolution. The top brass in the EU need to wake up to this reality.
I agree
Without debt write off the EU and Euro cannot survive now
It is time the realised
And Germany realised it has to play like a grown up economy and a partner now
Thanks for posting this, Richard. It’s interesting to see the full list of Syriza’s alternative proposals, particularly as the media is dominated by variants of the “worse than communists” trope noted here. Personally I hope this does come to a head and Syriza get their day in the sunlight. But there’s no doubt that they’re going to be blitzed by the EU, EC, ECB, IMF and every other national, pan national and international organisation whose ideology and operation is centred on the so called “rights” and demands of capital being always and everywhere paramount to that of labour and the needs of people more generally (e.g. doing something about up to 58% unemployment for young people, and a decline in real pay of around 50%!!!).
It’s less than a week since Wall Street reasserted its control over US democracy, and congress in particular, to kill the Dodd/Frank act, and take the relationship between banking and finance and the state back to a pre-crash model. So if – as now seems likely – we are finally really heading toward a showdown between the forces of, exploitation, inequality and privilege (ie. governments, institutions and apparatus of neoliberalism) and alternative philosophies and approaches that promote equity and respect for ordinary citizens, it’s going to be interesting to see what the outcome is. Of one thing we can be sure, though. The City of London will be fully engaged in protecting the status quo – by which I really mean, advancing privilege, inequality and exploitation.
Ivan
That’s a theme I and others are talking about in Committee Room 16 of the Commons tonight
Best
Richard
I noted that event from a previous blog, Richard. I hope it goes well, as I’m sure it will.
By the way, and on a slightly related note. This time of year I often have a throw out of old books and such like. Yesterday I came across this in the 4th Edition of David McKay’s “American Politics and Society”, from 1997 (page 308):
‘Perhaps the most remarkable development in American social policy over the last twenty years is the virtual abandonment by Democratic leaders of the sort of redistributive measures associated with the New Deal and Great Society. For, while social security and Medicare remain politically sacrosanct, welfare and a number of other income support programmes are now viewed with hostility. For Republicans and those on the right, it was always thus. Today they have been joined by many democrats including a Democratic president [Clinton]. In this sense, the status of a major aspect of American social policy has been returned to its pre-New Deal position.’
As well as reminding me that this is where so much of the Blair government’s ideas came from – and how well the ground was prepared for Cameron and co – in the context of this blog it also illustrates how the banking crisis has been used as an excuse across Europe to further undermine and intensify the destruction of almost every aspect of the post WW2 social and economic settlement that actually began some decades earlier.
Indeed
Endgame start: http://www.alt-market.com/articles/2444-imf-now-ready-to-slam-the-door-on-the-us-and-the-dollar
The ‘Worse than Communists’ analysis is an interesting one.
A continuation of the current monetarily-orthodox austerity will result in static or diminishing economic activity, and diminishing tax revenues in Greece; it follows that there will be bailout after bailout until the inevitable default, followed by a bailout of the banks.
All of it funded by taxpayers.
I fail to see that taxpayer-funded Socialism-for-the-banks is much of an alternative to communism.
Agreed
Someone just posted this on Facebook: “DIE Welt states from unofficial German economics ministry sources that if Tsipras implements a section of what he says then the EU will cut off funding…”
Meltdown will happen, I am sure
And Germany will have to wake up to its responsibilities
Greece cannot pay and never will. The only question is when Germany realise that
The real question is, since Germany does realise that Greece is unable to pay, is what is in it for Germany.
Neither france, nor Germany, has much interest in the “European experiment” beyond what is good for them.
It’s quite sad really, that we are ruled by people who are little more than paid servants of the elite, while they pretending to be servants of the voting fools: Us.