The Greek Crisis and the Threat to the Euro

February 19, 2010 12:00 am Published by Leave your thoughts

Greece, like all the other capitalist countries afflicted by the recession, is running a big deficit on its government budget. Tax revenues have collapsed and more benefits are having to be paid out to the unemployed. Deficits for the European Union countries as a whole tripled from 2.3% to 6.9% from 2008 to 2009 because of the slump.

For Greece it’s worse. The Greek deficit at the end of 2009 was 12.7% of national income (GDP). Government debt was 135% of GDP. Between 250 and 300 billion Euros in Greek government debt is sloshing around the bond markets and banks of Europe. This calls into question the solvency of the Greek state. Since some of these bonds are owned by financial institutions it could also mean a run on Greek banks at some stage, as speculators decide the government can’t pay its spiraling debts. Prime Minister Papendreou’s government is in crisis. Swept into power last year on a programme of reforms PASOK (roughly the equivalent of the Labour Party) has been forced into an about turn, imposing savage wage and spending cuts and trying to face down waves of angry protest including huge demonstrations, strikes, and a tractor blockade of the roads by farmers. This is a crisis government, and Greece at present is at the epicentre of the crisis of government finance and the political battles it will cause all over Europe.

Greece is disparagingly known in the Eurozone as one of the PIIGS (Portugal, Italy, Ireland, Greece and Spain), the weakest economies in the European Union. The PIIGS as a whole owe 2 trillion Euros in government bonds, a huge destabilising factor in financial markets. As these paper assets come under speculative attack, it could sink banks that hold these securities all over Europe.
Greek relative unit labour costs (a measure of competitiveness) have risen by 30% against Germany’s over the past decade. As a result of this loss of competitiveness Greece is running a chronic deficit with the rest of the world and has built up massive debts abroad (just short of 150% of GDP). These figures suggest that Greece should devalue her currency by about 30% to maintain competitiveness against the Euro. There’s just one problem. Greece hasn’t got its own currency. Greeks share the Euro with Germany and the other strong European economies. Though a small country in South East Europe, Greece has therefore been identified by the speculators as a weak link that could bring the whole immense effort to achieve monetary unity in Europe crashing down.

So, if Greece can’t devalue, it will have to deflate – drive down wages by 30% to compete. When stockbrokers’ newsletters declare that ‘the bond markets want this’ they mean that ‘the rich and the banks want this’. The rich exert their influence on elected governments through what are seen as market forces. If they don’t think a country’s safe for big business, they won’t lend to the government, they will sell government bonds and so put the country in a spin. That is what is happening now. The rich want to impose a catastrophic fall in the living standards of ordinary Greek people to pay for the crisis.

To see how fixed exchange rates make a nation vulnerable, cast your mind back to Britain in 1992. Major’s Tory government had joined the European Exchange Rate Mechanism (ERM), the predecessor of the Euro. Like Greece today, Britain was running a deficit as a result of the incapacity of British capitalists to compete with their foreign rivals. Speculators swam around the British currency like sharks smelling weakness. Sterling provided them with a one-way bet. If they bet against pounds and Britain didn’t devalue, they hadn’t lost a penny. If sterling was forced out of the ERM they made 14% in one day. That beats working for a living! So the wall of money piled up, making devaluation inevitable. The Tories, for their part, threw billions at the international exchanges, and found themselves in effect throwing schools and hospitals at the markets in vain. This is what Greece is up against now. The difference is that France and Germany, the big powers within the EU, realise that the ejection of Greece from their treasured single currency project could spell the end of the Euro.

A single currency should mean a single interest rate across the Eurozone, set by the European Central Bank, which is in charge of monetary policy across the entire region. But Greek government securities have recently been trading at nearly 4% higher rates than German bonds. Speculators would describe this as a risk premium. In other words they’re demanding a higher rate of interest because they’re not sure they’ll get their money back. These higher rates mean that over 11% of Greek government spending goes just to service the national debt, not to pay for any services. In effect sovereign debt, the borrowing by governments, has become another arena for speculation. Gillian Tett asked the question in the Financial Times (22.11.09), ‘Will sovereign debt be the new sub-prime?’ The toxic effect of sub-prime mortgages lent to people who couldn’t possibly keep up the payments in a few states of the USA was spread round the world. The mortgages were wrapped up in fancy bits of paper called CDOs (collateralised debt obligations) and lent on through the global banking system. In this way poison was injected into the bloodstream of the entire capitalist world economy.

Now financiers are betting on the solvency of whole nations through esoteric instruments called Credit Default Swaps. CDSs are described as insurance against sovereign default. Actually CDSs are just a fancy way of placing a bet as to whether the country will be unable to pay its debts and default. As one analyst commented, ‘It’s like letting an arsonist insure your home.’ But it has the same result as the sub-prime crisis – it spreads the risk. Until a couple of years ago capitalist apologists boasted about globalisation. Financial ‘innovation’ and ‘sophistication’ could thus lead to a globalisation of financial distress. So has Greece been bailed out or hasn’t it? Deal or no deal? The Franco-German axis within the EU has made sure the Greek people are going to have to take their nasty medicine.

And the EU officials have used their weakness to give themselves the right to poke their noses into Greek government affairs. They are not willing to commit themselves to an unequivocal promise that they will save Greece from national default. It’s partly a matter of short-sighted national self-interest on the part of politicians supposedly committed to a grand pan-European ideal. They don’t want to put their hands in their pockets. It’s also the case that, if they do commit themselves to a Greek rescue, then they have made an open-ended promise to throw money at the foreign exchanges, like the Tories in 1992. For the speculators, that would be money for old rope.

On the other hand letting Greece go would be a nuclear option. It would be a step towards the collapse of the Euro. Pressure could build up to make this unstable equilibrium collapse. EU functionaries are in denial. Monetary Affairs Commissioner Joaquin Almunia declared recently, “Greece will not default. In the Euro area, default does not exist.” This has already been compared to the economist Irving Fisher’s assertion in October 1929 just before the Wall Street crash that, “Stock prices have reached what looks like a permanently high plateau.” It’s much better for now for the EU bigwigs to twist the garotte round the neck of the Greek people and keep the pressure on Papandreou. So the government is supposed to cut big chunks out of its budget year after year. But this will mean depression in the Greek economy. Not only will this impoverish the common people and impact hardest on the poor and the weak. It will be like trying to hit a moving target as the economy, and with it the foundation for government finance, keeps shrinking.

This crisis is not going to go away soon. Every time a new tranche of government debt needs rolling over, there will be another flutter of speculation, and the EU powers that be hope that will keep the pressure on PASOK. But there will be pressure from below as well, increasing pressure from the working class who don’t see why they should pay for a crisis which is none of their making.

Is Greece really a failed state? There’s no doubt they have a failed capitalist class, a class incapable of uniting the nation behind itself. They have failed to invest in Greek industry since the foundation of the modern state in 1829. They usually live abroad and lead the way only in tax dodging. Obscenely rich shipping magnates and others don’t pay a penny in tax, leaving that to ‘the little people.’ Greek government finances are murky. Some calculate that, if all the ‘off balance sheet’ items such as pension commitments are included, debt could be a horrifying 875% of GDP! Things cannot go on as they have been – that’s for sure. But the Greek workers and peasants will have to settle accounts with the capitalist class to sort out the mess they have created.

This article first appeared on Socialist Appeal.

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This post was written by Mick Brooks

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