Greek Eurozone Crisis: A Tale Of Austerity And Farce

It’s a telling commentary on the superficiality of the Australian political debate that while we obsess over the finer details of a single public television show, the Greek debt crisis has reached its miserable denouement.

Over the past week, as media and politics types in Australia have engaged in endless debate about the rights and wrongs of Zaky Mallah’s Q&A outburst, the nation of Greece has effectively defaulted on several hundred billion Euros in international loans.

Australia’s much-distracted Abbott government seems to be rather nonchalant about the possibility of a European financial meltdown, but the risk is real for both Australia and the world.

In the short-term, the consequences are yet more pain for the beleaguered Greek people. Banks are closed, ATMs are empty, and panic shopping has broken out. Businesses will struggle for solvency and the vital tourist economy will undoubtedly be harmed.

Much worse is to come. The impending default will wipe out vast swathes of household wealth in the country, as Greek-held Euros slide rapidly in value. By the time banks re-open, Greece may well have a new currency, and the value of many of the assets in Greece may be worth half as much as they are now.

In the longer term, the political consequences are likely to be even more serious. The European project is unraveling, and much of the fault lies with politicians in Germany and elsewhere, that have presided over the Greek debt negotiations.

The scale of the political failure in Europe is sobering. Europe’s leaders, most importantly Angela Merkel, have pushed Greece into a disorderly default, and Europe into its most significant crisis since the Balkan wars.

At its heart, the Greek crisis is alarmingly simple. The state of Greece is broke.

Greece has suffered a devastating economic depression as bad or worse as the Great Depression of the 1930s. Its unemployment rate is 25 per cent. Its youth unemployment rate is 49 per cent.

Greece’s debt totals more than €320 billion, including a whopping €195 billion owed to the Eurozone through the European Financial Stability Fund and bilateral loans from Eurozone countries. In addition, the International Monetary Fund is owed another €24 billion, and there is more private debt owed to those bondholders crazy enough to invest in Greek sovereign bonds.

In an economy only half as big as New South Wales, paying back such whopping figures is impossible.

It’s not as though Greece hasn’t tried. Whatever the rhetoric about lazy Greeks living beyond their means, the successive governments of Greece since 2010 have moved mountains to try and reform the local economy. The government has reduced its public workforce by roughly a quarter. Real wages have fallen by a fifth or more. Tax revenue is up while government spending is way down. The government budget is actually in primary surplus (leaving aside debt repayments).

And yet despite all this, Greece needs a new bailout if it is to cover its ongoing debt repayments. How could it be otherwise, when the Greek economy is one quarter smaller than it was five years ago?

Now all bets are off, after negotiations between the Greek government and the European “Troika” broke down over the weekend.

In the end, European intransigence took the negotiations down, as European finance ministers refused to give Greece an extension to allow it to hold a referendum on the next round of European austerity measures. Paul Krugman called it “an act of monstrous folly on the part of the creditor governments and institutions.” 

Beholden to their domestic constituencies, and perhaps blinded by the radicalism of Greece’s leftist Syriza government, Europe’s Troika have instead badly overplayed their hand – backing Greece into a corner in increasingly acrimonious confrontation.

As a result, Greek voters are now in the absurd position of voting for a bailout package that is no longer on offer.

Perhaps the Eurocrats simply believed Alexis Tsipras and Yanis Varoufakis would eventually buckle, and toe the Brussels line. But Tsipras played a canny game, refusing to accede to increasingly authoritarian European injunctions.

Now Greece has been pushed over the edge.

The absurdity of the situation is that European leaders such as Jean-Claude Juncker and Christine Largarde surely know Greece can never hope to repay its debts, and that in the end lenders will never see most of their money back. But they seem unable to face up to the reality.

As a result, a crisis everyone saw coming has still managed to blindside the European financial markets.

In truth, the real surprise is that anyone should be surprised at all. It should always have been obvious that the strange European experiment was fundamentally unstable, given the history and economics of the continent.

Internet commentators are playing an enjoyable game of “I told you so” today, as people drag out articles from years ago predicting precisely this course of events.

Back in 2010, Krugman warned that “it’s all too easy to imagine a default on debt, triggering a crisis of confidence, which forces the government to impose a banking holiday — and at that point the logic of hanging on to the common currency come hell or high water becomes a lot less compelling.”

In 2011, Nouriel Roubini wrote that “scenarios that are treated as inconceivable today may not be so far-fetched five years from now, especially if some of the periphery economies stagnate.”

The prize winner for prescience must go a 1992 London Review of Books essay by Wynne Godley, in which the economist wondered aloud what would happen to a Eurozone country crippled by economic downturn. “If the unemployment rate went back permanently to the 20-25 per cent characteristic of the Thirties,” he thought, “individual countries would sooner or later exercise their sovereign right to declare the entire movement towards integration a disaster and resort to exchange controls and protection.”

For much of modern history, Europe has been a fissiparous and conflict-prone continent. The attempt to stitch its various member nations into a superior economic whole was a noble experiment, but it was doomed. The current system has obvious and fundamental flaws: individual nations do not control their own currencies, their own central banks, or their own interest rates.

The true institutional deficit in Europe is democratic. To take one rather glaring example, there is no formal mechanism by which a member state can leave the Eurozone. The consequences of this disastrous lack of foresight are now playing out. 

In effect, Greece is voting on the future of the entire European project.

The current disaster has in effect been brought on by a loose confederation of mandarins and big state politicians, though Angela Merkel must surely be the person ultimately held responsible. With no genuinely democratic supra-national institutions to negotiate member state differences, Europe’s current crisis has no simple way of resolving itself. 

And so we witnessed the astonishing spectacle of Jean-Claude Juncker, a true professional Eurocrat, delivering an extraordinary speech in which he accused the Syriza government of betrayal.

Juncker is a long-serving former prime minister of Luxembourg, who has spent almost his entire career climbing the ranks in Brussels. Juncker himself negotiated on several of the key clauses in the Maastricht Treaty, and, as Luxembourg’s finance minister, even got to sign it. 

In his speech overnight, Juncker lashed out at Greece and its government, telling a packed hall in Brussels that “I have done everything that can be done to facilitate an agreement.” Rather plaintively, Juncker pleaded that “this is not a stupid austerity package,” before railing against the Greek negotiating team.

Amazingly, the man once in charge of one of the best-known tax havens in the world criticised Greece about its “vested interests” and referred to suicide, a highly sensitive topic for a nation that has seen a well-recorded spike in suicides since the onset of the crisis.

Now the disaster is gathering pace. The next Greek payment, due to the IMF within hours, will now almost certainly be defaulted on. It will be merely the first step in what now seems like the beginning of the end of the Eurozone.

There are lessons for Australia in the Greek tragedy. Perhaps the most important is that economic policymakers can get it wrong – very wrong.

Greece’s current troubles are primarily due to the fiscal consolidation imposed on it by Europe during an economic downturn. That’s austerity. Economists have repeatedly warned it doesn’t work – but that hasn’t stopped Europe from demanding it.

In truth, “stupid austerity” rarely works. Australia would be well advised to take note.