The Real Greek Crisis

Most people will feel that they don’t need to look far for an explanation as to what lies behind the Greek crisis. Lazy reporting and racial stereotyping will persuade them that the Greeks – a feckless lot, no doubt – have spent more than they should, got into debt, taken out loans from the hard-working Germans and now won’t repay the loans because they refuse to tighten their belts.

But there is another narrative that tells a somewhat different story. That story is one of a powerful economy enforcing its will on its weaker neighbours and refusing to acknowledge that it has thereby made it impossible for them to dig themselves out of a hole.

The story begins at the turn of the century when the Greeks, along with many others, were persuaded that being part of Europe required them to give up their own currency and accept the euro. A single currency meant a single monetary policy and a single central bank – and guess who decided what that policy should be and what the central bank should do?

Germany, by far the most powerful economy in the euro zone, ran it to serve its own interests, but life wasn’t so easy for the weaker countries. The Greeks, for example, with their smaller and less developed economy, had no chance of surviving the competition from efficient German manufacturing. We do not need the benefits of hindsight to make this point, since many commentators, myself included, foresaw the inevitability of this outcome at the time.

As things began to go wrong, and they had to borrow to keep their heads above water, the Greeks were assured that they could look to the Germans and others to help them out. But this was in the days of cheap and plentiful credit; when the Global Financial Crisis struck and the cheap credit dried up, the creditors who had happily lent to the Greeks wanted their money back.

The Greeks didn’t have the money. But the price they had to pay for borrowing yet more from the IMF and the European Central Bank was to accept a programme of savage austerity. The cuts they have already been forced to make have meant that 25% of the Greek economy has simply closed down and 60% of young people are without a job. Again, as some commentators observed at the time, it was impossible to see how the Greeks could ever – from an already weak economy that is now so much smaller and still going backwards – find the resources needed to repay their debts.

And so it has proved. The price that creditors insist upon for a continued bail-out is yet more austerity which can only mean yet more closures and unemployment. Leaked papers show that the creditor institutions themselves recognise that more austerity will make it even less possible for the Greeks to pay back their debts.

So why are the Germans and other creditors determined to force the Greeks into such a damaging dead end? The answer is that they care little for the travails of the Greek people. Their focus is on those countries that are watching the Greek situation closely – countries like Spain, Portugal, Bulgaria, even Italy, that have faced similar problems, and suffered similar penalties, but that have not yet been compelled by pressure from their populations to resist a further descent into even more austerity.

The fear from the financial establishment and from the Germans in particular is that the Greeks might find a way to demonstrate to other similarly afflicted countries in the euro zone that there is a way out – and that those other countries would then follow a similar course. The rational course for the Greeks to take, after all, would be to leave the euro zone, restore their own currency and then print the drachmas needed, as monetarily sovereign countries are able and entitled to do, and repay their debts in devalued drachmas.

The difficulty that Greek Prime Minister Tsipras faces is that he has committed to resist austerity but also to retain the euro. It is doubtful that he can achieve both. In the forthcoming referendum, no one can be sure whether the dislike of austerity or the fear of leaving the euro zone will prevail. The poor and the unemployed – those who have suffered most from austerity – will vote to reject the new bail-out offer; the holders of assets and the pensioners will vote to stay with the euro.

Either way, the outlook for the euro looks bleak. In the long run, the attempt by the financial establishment to over-ride the wishes and interests of ordinary people and to negate the power of a democratic government to protect them will fail. The only question is as to how many more crises there will be and how much more suffering has to be endured before common sense prevails.

Bryan Gould

2 July 2015.