Reforms? I Don’t Think So.

As the Greek crisis unfolds, we are constantly informed by the world’s media that the European power-brokers will agree to a further bail-out only if Greece implements a programme of “reforms”. Most people will see this as confirming their understanding of what the crisis is about. The Greeks, it seems, have mismanaged their economy; so what could be more sensible and reasonable than to insist, as a condition of any further help provided to them, that they should improve their economic management? And, if they refuse to “reform”, surely they have no one to blame but themselves?

The constant use of the term “reforms”, however – no doubt seen by the media as a neutral and objectively accurate term – is nevertheless grossly misleading. It reflects a view of the crisis that is very much that taken by the Germans and their client states, but is a long way removed from what is really at issue. It has become a real obstacle to a clear view of the causes of the crisis and of the only realistic way forward.

When the Global Financial Crisis (for which the Greeks had little or no responsibility) exposed the frailty of the Greek economy, and the level of indebtedness that they had been allowed and encouraged to take on as the price of living with the euro, Greece found that they were unable to repay their creditors. Those creditors agreed to bail them out, but on condition that they put in place a programme of “reforms”. The Greeks had little option but to agree.

Some of the “reforms” were long overdue, and addressed some of the obvious failings – the inefficiencies, the slackness, the unduly generous social provision, the tax evasion – that had characterised Greek economic management. But many others were designed to impose on Greece the kind of austerity measures that the euro zone leaders had insisted on as a response to recession and which – it is now clear – have condemned the European economy as a whole to a prolonged stagnation.

Those measures had a particularly direct and damaging effect on the Greek economy. Public spending was cut, pensions and other benefits reduced, tight monetary policy introduced, bank lending fell. As many warned at the time, it was hard to see how a weak and uncompetitive economy that had run up large debts and that was now required to take on the burden of repaying them could hope to do so if they were at the same time obliged to adopt policies that ensured that the economy got smaller.

And so it has proved. The entirely predictable outcome of the “reforms” made by the Greeks has been that their economy is now 25% smaller than it was and unemployment has soared. Their ability to service and repay their debts is much reduced. But none of that seems to worry their taskmasters; they insist on yet another round of further “reforms” as the price of extending the bail-out.

The extraordinary aspect of this is that the course insisted upon by the creditors is not even in their own interests. The “reforms” they demand can only reduce still further the Greeks’ ability to repay what they owe. With the best will in the world, the Greeks will find that – after a few more years of “reforms” – they are yet deeper in the mire.

So what is really in play here? The answer lies in ideology. There are, after all, many precedents in recent times for what the Canadian writer, Naomi Klein, in her influential book The Shock Doctrine, has described as “disaster capitalism”. Countries faced with natural disasters or political paralysis or economic collapse, and that need as a result to ask the IMF or some other agency for help, have all too often been required to put in place what are usually called “structural reforms” as the price of that help.

So, countries like Chile, recovering from the turmoil of the Pinochet dictatorship, Argentina, Bolivia, Uruguay, Poland, and Russia, have all found themselves obliged to implement policies of privatisation, deregulation and savagely reduced public spending in order to qualify for help. In each case, the results have been the same – economies where inequality widens rapidly, the fat cats make large fortunes overnight and ordinary people suffer poverty and unemployment.

It is not just economies facing specific crises that have fallen victim to “disaster capitalism”. When the Japanese economy stagnated in the 1990s after several decades of rapid growth, the remedy prescribed by western experts was “structural reform”. But, as Professor Richard Werner of Southampton University and a former Shimomuran Fellow with the Bank of Japan has demonstrated, the nostrums so dear to the hearts of neo-classical economists failed over more than two decades to solve the problems but instead entrenched them. They have now been abandoned by Shinzo Abe’s government.

What we are witnessing in Europe is, in other words, a triumph of ideology over common sense and constantly repeated experience. As always, the price for these mistakes is paid by ordinary people. Reforms? I don’t think so.

Bryan Gould

13 July 2015