by Iva Vučićević
George Papandreou, the last majority leader prime minister of Greece, had to convey an unpleasant message on behalf of Greek Social Democrats, after he was reinstalled in power in 2010. The gaping hole in Greece’s finances is double what was previously feared. Instead of the initially reported 8 percent, the budget deficit had reached almost 16 percent, while a gross debt (ratio of debt to GDP) amounted to 130 percent.
Soon thereafter, the Greek public debt was downgraded to junk, and the first bailout package was agreed upon in Brussels. In one fell swoop severe austerity measures were imposed on public and private economic activity, triggering protests from both sides of the political spectrum. Today, the budget deficit is around 13 percent, gross debt gravitates towards 180 percent, about a quarter of population is unemployed and the national economy records marginal growth rates.
Greek political and economic elites have been united in a marriage of convenience, resulting in lax fiscal discipline and an almost endemic passion for corruption. The statistics departments in Athens persistently under-reported national financial parameters, by excluding, for instance, medical expenditures from the overall public expenditure. Contrary to the prevalent belief amongst neoclassic economists that wages should reflect productivity, wages in Greece were less the product of domestic productivity than they were of foreign investment. Indeed, Hellas relied on inflows of foreign capital for financing public administration.
These shortcomings were a necessary but not sufficient condition for understanding a depression comparable in magnitude to the American experience during the Great Depression of 1929. In both cases the national income shrunk by almost 25 percent. The missing puzzle-piece is the Subprime mortgage crisis and its repercussions on the structural design of the eurozone.
For grasping the financial crisis of 2008 in its full historical continuum, one must look back to the Bretton Woods Conference of 1944. In his book The Global Minotaur, Greek finance minister, Yanis Varoufakis, argues that rising as the sole power in the aftermath of the Great War, the chief economic concern of the U.S. was to avoid reoccurrence of 1929. This was one among many rationales for the Marshal plan: to enable post-war economies (most notably Germany and Japan) to act as markets for American goods. In this way, the U.S. maintained trade surpluses vis-à-vis Europe and Japan, while at the same time reinvesting a certain portion of these surpluses in the post-war European economies, Japan and later China.
He further argues that in early 1970’s, when the U.S. had ceased to run trade surpluses, its chief economic architects came up with an idea that in essence resembled the British World War II shibboleth, “Keep calm and carry on.” From then on, the U.S. maintained its position of economic dominance by steadily deepening its trade deficit. At the same time, profits that other countries had made in trade with the U.S. and the rest of the world, were sent back to the U.S. and invested on Wall Street, following the logic of the highest return. This led to an exponential capital accumulation, stimulated the creativity of financial engineers and, facilitated by an extensive deregulation, formed a bubble that was completely divorced from reality.
When the bubble burst in 2008, European leaders found their banks immersed in the financial vortex to an unexpected degree. Soon thereafter, banks curbed their lending activities out of uncertainty about others’ creditworthiness, or they simply became insolvent. A resulting liquidity trap had adverse effects on almost every European economy, yet it was most detrimental to its weakest part: Greece.
The crisis is thus systemic and requires a systemic response. In their “A Modest Proposal for Resolving the Eurozone Crisis,” British economist Stuart Holland and University of Texas professor James K. Galbraith together with Varoufakis propose the decoupling of banking losses from the state budget (the predicament of Ireland); coupling debt repayments to the GDP growth of indebted states (in the case of Greece, but also Italy and Spain); and allowing for a European-style Marshal Plan.
This approach is feasible solely as joint European project. And precisely this elevates the issue from an economic to a political concern. Introducing Eurobonds or having a joint investment budget would not only increase the liabilities of northern Eurozone countries but also accomplish the idea of the full-scale European integration, where bargaining power within the EU ceases to reside in a country’s relative economic strength. Northern EU member states, personified by, but not restricted to Germany, are thus faced with a dilemma between retaining political power or maintaining the Union that was instrumental to the formation of their very power.