The Greek Drama and the Social Justice of Responsible Fiscal Policies
I do not envy our Greek socialist friends. They got elected because the previous conservative government was catastrophically incompetent, but the mess they now have to sort out is worse than the wildest imaginations could have predicted. This is not just a local problem. The fate of the euro, and therefore of Europe, hangs in balance. What the Greek government does will decide the future of European social democracy for years to come.
The Euro Area’s Achilles’ heal are buoyant deficits. The European Commission expects new government borrowing in 2010 to be 6.9% for the Euro Area, 14.7% in Ireland, 12.2% in Greece, 9.3% in Spain, and 8.7% in Portugal. In Sarkozy’s France it is 7.7%. Outside Euroland the UK is expected to run negative balances of 12.9%, Latvia of 12.3% and the USA of 13%. By contrast, for Germany the expected deficit is only 4.6% and in Austria or the Netherlands the figures are similar. According to these estimates, only Bulgaria will fulfill the famous Maastricht criteria of 3%. Not surprisingly, the Greek debt to GDP ratio, which was 95% only 3 years ago, will shoot up to 125%, the highest level in the European Union and more than double of what the Treaty requests. No wonder, financial markets are in turmoil. If unchecked, they could bring down the whole edifice of the European construction.
Remedying this situation will be very, very painful. Why should Socialist governments care and execute the hidden needs of financial markets? There are many reasons for Socialists pursuing orderly fiscal policies, but we can concentrate on two strong arguments: preserving government’s capacity to act and social justice motives.
Modern social democracy has learned to accept and live with markets. This includes, of course, financial markets, for they are an efficient instrument to allocate resources to private goods, provided the proper regulatory framework is in place. In a social market economy, the government provides public goods in accordance with voters’ preferences and in many European member states these resources are close to one half of all goods and services produced. These public purchases are financed overwhelmingly by taxes of all kinds and, to a small part, by public borrowing.
When the government borrows, it issues debt titles (i.e. bonds), which are bought by private savers, maybe by households, but most importantly by institutions which manage individuals’ savings and retirement. Of course, economic freedom means, they will only buy these securities if they will get a return that is comparable to what they could get elsewhere and if they are reasonably sure that the government will honour its commitments in the future.
This is Greece’s trouble: many people doubt that the Greek government will still be able to serve its debt in the future, if it continues borrowing at the present rate. The higher the debt ratio rises, the heavier will be the debt service, i.e. the interest and repayment on the outstanding debt, today. Now, what would happen, if the Greek government failed to pay its debt?
Many media speculate that it could mean the exit from the euro. Wrong. Monetary union is defined by the fact that commercial banks can always obtain the liquidity they need from the central bank. Leaving the so-called ‘discount window’ open, i.e. allowing banks to get all the money they demand, is a prerequisite for the stability of any monetary system. During the financial crisis we have seen the European Central Bank doing a superb job in preventing a meltdown. Thus, even if the Greek government would have to suspend its interest payments, Greek and other banks would continue to have access to the ECB and get the money they need. Firms will continue to borrow from banks. Only those individuals and institutions that hold Greek bonds would be short of money. This could be bad for some banks with substantial amounts of Greek government assets in their portfolio and they may need help, but there is no reason for the whole country to leave the Euro Area. If anything, the incentives to stay are stronger than before.
The problem is rather that the Greek government would cease to exist as an economic actor. Insolvency means it cannot pay for the public goods that citizens desire. Without financial means, governments are powerless. The proper way for social democratic policies is therefore to pay for desirable social goods out of taxes rather than by borrowing money. It is a matter of honesty, of transparency, and of democracy. For only if people know that they can and how much they need to pay for their public goods will they be able to make collective choices in accordance to their preferences. Thus, balancing budgets is a necessary requirement for governments to pursue the policies their voters want them to implement.
However, there is political danger from populist agitation claiming that sticking to ‘the rule of Maastricht’ is responsible for social destruction and poverty. Of course, in a crisis, public deficits help stabilise output and employment. No social democratic government would refuse to stabilise the economy. But even this common-sensical policy is disputed by conservatives, who accuse governments of burdening future generations. The two arguments together make for an explosive cocktail.
This leads us to the second argument. It is about social justice. Many media and politicians claim that one must reduce budget deficits because going into debt now creates a burden for future generations. This is simply nonsense. When a government borrows today, it issues a bond that is repaid with interest in the future. The debt service on this bond will require taxing people in the future. That is true. But a bond issued now is bought by some more or less wealthy savers, who refrain from consuming today, so that they get income in the future. Hence, the taxes raised by future governments to repay debt are income for future bond owners. There is no burden on future generations, for the next generation consists of wealthy bond owners and of a broad public that is obliged to pay taxes. Therefore, government debt does not create intergenerational injustice.
So where is the problem? Unfairness is generated, in the present and in the future, because public debt is paid for by taxing people in general, while the income derived from the debt service only benefits the small group of wealth owners, who were able to save and buy government bonds. Public debt redistributes from the many to the few, but it does not create merry times for our generation and hard times for the young. The larger the size of public debt relative to GDP is, the worse the income distortion will become.
This is where the Greek problem becomes urgent again. Greek tax payers will have to pay 5.6% of GDP to cover the interest on government debt in 2010. In Italy, the debt/GDP ratio is 120%, and the interest payment is 4.7%, while in Germany and Spain, with debt ratios of 76% and 66% respectively, the burden is only 3% and 2%.
The moral of the story is, of course, that socialists know better how to handle public finances than conservatives and liberals. Because they know of the value of good government, they are willing to pay for it. They do not shrink the public sector by undermining public finance as liberals all to often do. But convincing voters of fiscal rectitude is a tough job ahead for the Greek government, as it is for all social democrats. Their success will determine whether Europe will be captured by conservative populists or realise a fairer and more social Europe.
This article requests some serious doublethink. So anyone opposed to monetarism is a populist conservative? That’s a joke, and borderline offensive.
Let’s try and deconstruct what you are saying… before that, let me comment on a word which is missing from your article. Capitalism. It’s an important omission, as you refer to markets, but fail to place their operation within a social context.
Market mechanisms in certain contexts have beneficial outcomes. However, it is capitalism as a system which has successfully mobilised against the public sector, thereby expanding the contexts in which markets operate. I can’t see mentioned in your article, the role of the EU, with liberalisation by directive. The role “white flag social democrats,” have played in enshrining a small state into law, in possession of limited assets and therefore with limited powers of mobilisation beyond crude monetary/fiscal measures (raise taxes/lower taxes).
Previous options, for re-organising of industry, directing an expansion of apprenticeships, redistributing productive power, are no longer allowed. Perhaps the best word to describe this is “Verboten”! So the giveaway here is the following line
“socialists know better how to handle public finances than conservatives and liberals. Because they know of the value of good government, they are willing to pay for it.”
In this model, all government essentially does is “handle” public finances. Actually, the running of an economy, with both demand- and supply- side aspects, is about so much more than handling public finances. In the neo-liberal model to which Stefan apparently subscribes to , the main backbone of the economy – power generation, industry, transportation, logistics – is best left to large multinational companies. The state is left with the welfare burden, the education burden, the core infrastructure burden. Unsurprisingly under the weight of this – without the leverage of significant levels of social ownership – many states are beginning to crack. It’s not just Greece… it’s half of the EU. The crisis is real.
You write “many people doubt that the Greek government will still be able to serve its debt in the future” – who are these people, exactly? Is it the same credit agencies that blundered into the recent banking system collapse, and therefore, should social democrats be complicit with a financial system based on their opinions?
For sure, many EU states are in a debt trap as a result of the financial markets’ failure. But the people set to pay the price are the young, the unemployed and pensioners. This is not acceptable. Not acceptable morally, at a fundamental level. Stefan’s advice to Greece, if applied to the EU, will have catastrophic social consequences, which will reverberate politically.
Stefan appears to be arguing that because of bankers’ corruption and greed, we must follow a prescription written by the same architects of disaster. He’s wrong, and I’m not the only one that disagrees. The Maastricht criteria have been routinely abused and misused for years, by Germany and France. I don’t remember seeing such righteous comments in the years that France and Germany trangressed.
The EU is becoming an institution notable for double standards. To deny Greece a degree of flexibility, to allow Greece to be flattened by the demands of international capital – such a course will, in the long-run, hasten the demise of Europe as a united body. And we don’t want a situation where one is either for Europe OR for social democracy.
Dear Carl
Thank you for your comment. To make things absolutely clear: I do not subscribe to the neo-liberal model at all. If anything, my economics are influenced by Keynes. And I agree with a number of things you writze about the EU, which is why have repeatedly called for a European government in my books on the European Republic.
This piece is about public debt and its sustainability. There is a fundamental dimension about it, which I address in the paper, and a short term crisis management dimension, which I do only touch superficially. On the fundamental, yes, I believe solididy, and transparency, are social democratic values and they apply everywhere. They are not a desaster, they are our key to success.
Stefan
I’m sure we’d agree on transparency, and there’s no doubt a lackadaisical approach to graft and tax-dodging is a factor in Greece and other European states. I remember it was a “socialist” minister in Hungary, who when asked about avoiding tax, made comments about “not everyone always drives with a seatbelt” – or something to that effect.
I’m not sure that the issue of public debt can be taken as much in isolation, as you seem to do here. I hope I’m not misrepresenting your views, but what is increasingly common with widespread outsourcing and “one-man” companies is that there is massively increased potential for tax avoidance or corruption. For example, a bridge paid largely from EU funds, with 4 layers of contractors, and sub-contractors. And the EU/National authorities do not know or care what happens at the lowest layer, to the people who are being paid (or not paid) cash-in-hand for rolling tarmac. If anything, the influx of EU funds, with its emphasis on private contracts, has often helped to corrode any lingering sense of public service ethos – sad but true.
The debt crisis reflects our economic structures which have resulted from deliberate policy, driven by an elite which includes many of “our” social democratic politicians. By all means, attack graft and wastage – but you can almost guarantee that simply slashing budgets on its own will not proportionately reduce this graft and wastage. It will make the people who are “outside the loop” unemployed and poorer. It’s no answer if we want to look people in the eye. I like a lot of our Greek socialist friends and I want to be able to look them in the eye. Debt renegotiation, careful investment, local accountability. I think that would help.
Stefan, you are trying to lead European socialism into a black hole, whatever your intentions.
“Additionally, the left must mobilise European public opinion. If the attack on mining communities and the NUM in the UK became emblematic of early neoliberalism, the attack on Greece is the beginning of its second phase. If Greece falls, the markets will no doubt attack Spain, Portugal, Italy and Britain next, with the European commission washing its hands Pontius Pilate-like, while sporting the robes of a tragic chorus. The future of democracy and social Europe is in the balance – the Greeks must fight for all of us.”
http://www.guardian.co.uk/commentisfree/2010/feb/04/greece-eu-fiscal-policy-protest
Greeks must fight the neoliberal EU
Costas Douzinas
Paul Bremer, the first post-war American viceroy, imposed on ravaged Iraq economic policies which the Economist called “a capitalist dream” regime. One is hard pressed to find a better phrase to describe the “stability” plan measures submitted by Greece and approved yesterday by the European Commission. The plan envisages a reduction of the country’s budget deficit from the current 12.7% of gross domestic product to 2.8 % in 2012 (by way of comparison, British debt hovers around 40% and American over 60%). The plan promises immediate 10% cuts in ministerial budgets, a freeze on public sector recruitment, the abolition of various tax allowances and an increase in indirect taxation. As if this was not enough, Socialist prime minister George Papandreou announced on Tuesday, in a dramatic broadcast to the nation, further unprecedented austerity measures, including an immediate increase in fuel tax, an increase in the retirement age and cuts in civil service allowances amounting to 10% of salary for most civil servants and up to 40% for academics. As in Britain, universities are the first to be hit, seen as a secondary luxury despite the much trumpeted “knowledge economy”.
All this will be applied to the poorest country of old Europe that has youth unemployment at 25%, stagnating growth and the traditional industries of shipping, tourism and construction under immense strain. These measures will complete a vicious economic circle of rising unemployment, shrinking tax revenues and profiteering market valuation of economic policies. They will sink the country from its current deep recession into an enduring depression with no obvious way out.
“Greece is in the eye of a profiteering storm,” Papandreou complained at his broadcast. He was referring to the reduction of Greece’s credit rating by three non-accountable private companies and the subsequent market speculation on Greek bonds financing the deficit, which led interest rates on sovereign borrowing to rise 4% above baseline. This is a repetition and intensification of the 1992 Soros attack on Britain’s currency, which led to the humiliating exit from the European Exchange Rate Mechanism, and the speculators’ attack on British banking in 2008. It marks a dismal state of affairs accepted by the European Union and governments: a few uber-capitalist hedge funds having brought down major banks are now betting on a country’s bankruptcy, hoping to bring it about through their self-fulfilling, short-selling positions.
There is no doubt that public sector employment and patronage have been used by the Papandreous and Karamanlis, , the ruling dynasties of post-war Greece, for political benefit, hugely augmenting the sector and its debt. There is no doubt that substantial tax evasion, corruption, and clientellism have contributed significantly to the current woes. But the cure is much worse than the disease and will be born as always by the usual victims: wage-earners, low-income groups, subsistence farmers and the unemployed.
On a broader front, Greece is becoming a test case for the new phase of neo-liberal correction in the wake of the economic and financial crises. The fiscal and taxation “stability” measures continue an idolatrous set of economic dogma that came to grief in 2008 but still dominates the thinking of European political leaders. The privatisation, deregulation and financialisation black arts have been theoretically rejected by many erstwhile believers, but are still dominant in the environs of a few elite business schools and the European commission. Obama launched last year a $787bn fiscal stimulus, which includes tax cuts, expansion of unemployment benefits and increased spending in education, health care, infrastructure and the energy sector; European Greece is condemned to fiscal starvation. Japan’s public debt is 225% of GDP and is financed through internal borrowing, with only 6% in foreign hands ; Greece is condemned to borrow on the foreign markets, paying interest that can only be called usurious. Economics commissioner Joachim Almunia was cynically clear about the aim of the “stability” plan, saying that Greece needs further “pension reform, healthcare reform, labour reform”. This is a brazen attempt to use a comparatively small debt problem to radically alter the class and state-society balance in a country known for its radical politics and militant unions.
The legitimacy of the European Union is based on principles of social justice and solidarity. Joseph Stiglitz reminded Europeans of their traditions in these pages by calling for a euro-bond issue to help Greece and other indebted economies. Such an immediate palliative would act as the tragic deus ex machina, but the neoliberal ghost has displaced god from the machine.
There is an even more worrying aspect to these catastrophic developments. Papandreou was elected four months ago on a platform of redistribution and social justice. He has now accepted to do exactly the opposite. This is a radical attack on politics and the best expression of the neoliberal hatred for democracy. Commissioner Almunia advised Greek politicians and the public to support the measures, adding a thinlyguised threat that revealed the staggering idolisation of the markets and the feigning of regulatory impotence. The markets could speculate successfully against Greek bonds, driving the cost of borrowing to unsustainable levels, only because the EU has set the public debt ceiling at an unrealistic 3%. The result is that the EU pushes Greece from one end, the markets from the other. This is a man-made perfect storm. Politicians and Eurocrats have accepted the role of bit players in a casino economy that has been declared above politics.
The violent impoverishment of large masses, the extensive privatisation of services and utilities through the radical reduction of the state sector, and the extensive dependency on foreign markets for servicing the debt amount to a loss of sovereignty compared to a state under foreign occupation, to an extensive re-arrangement of national assets in favour of capital and a serious European legitimation crisis.
Greeks are a proud people. They have been constantly bombarded by the media, the government and pliant academics intent on making them believe that they are to blame for the failures of a system none has ever voted for. Here in Britain we are well used to TINA; but we also know that there is always an alternative. Their current predicament puts Greeks at the forefront of a wider attack on the European principles of democracy, social justice and solidarity, always a little rhetorical but now comprehensively breached. Ideally, the government would forget the bogus orthodoxy that makes Greece as sovereign as Iraq and call for a national front to resist this barbaric attack. Such a move would mobilise national pride and a sense of injustice. It would divert Greek nationalism from its recent extreme, rightwing, xenophobic pathology to something much closer to the Hellenic tradition: the defence of democracy. Iceland called a referendum to decide on the repayment of its debt; so should Greece.
This is unlikely to happen, however, because the ruling party is too mortgaged to old clientelism and neoliberalism. The absence of a government-led reaction raises the stakes for the left, one of the strongest in Europe. The left has the historic responsibility to mobilise the Greek public against this tsunami of anti-democratic idiocy and injustice. The Greeks have shown that they know how to resist, from classical Antigone to December 2008 Athens. Already farmers have blocked main roads leading to the north and Bulgaria, making Barroso threaten legal action. Public servant strikes and a general strike have been called for later this month.
Additionally, the left must mobilise European public opinion. If the attack on mining communities and the NUM in the UK became emblematic of early neoliberalism, the attack on Greece is the beginning of its second phase. If Greece falls, the markets will no doubt attack Spain, Portugal, Italy and Britain next, with the European commission washing its hands Pontius Pilate-like, while sporting the robes of a tragic chorus. The future of democracy and social Europe is in the balance – the Greeks must fight for all of us.
I do not envy our Greek socialist friends. They got elected because the previous conservative government was catastrophically incompetent, but the mess they now have to sort out is worse than the wildest imaginations could have predicted. This is not just a local problem.
Interesting article!
As a comparative housing researcher from Britain living in Sweden I was particularly interested in the public debt figures you give.
The figures you give for Germany, Austria and The Netherlands agree with other figures I have seen and that also support my conclusions that the 6 European countries with social rental markets (the other three are Sweden, Denmark and Switzerland) have come out of the mortgage finance crisis relatively unscathed. Their debts are mainly due to having to bail out export industries (notably cars) from the recession, and fight the unemployment caused by the crisis.
All the countries with heavy debts – USA, UK, Ireland, Latvia and not forgetting Iceland – are those with what I have termed “monotenural home ownership policies”. Now we see the Mediterranean home owning societies beginning to get into trouble, starting with Greece.
Its worth reading the New York Times of 14 Feb, on how finance companies on Wall Street used creative accounting to help Greece hide the fact that it was breaking Euro regulations:
http://www.nytimes.com/2010/02/14/business/global/14debt.html?th&emc=th
Now, in the 25 Feb issue of the New York Times, the weak situation of the Greek economy is exposing it to speculation by Wall St. See “Banks bet Greece defaults on debt they helped hide” http://www.nytimes.com/2010/02/25/business/global/25swaps.html?th&emc=th