Greece: There will be Blood

The almost nightly dose of television horror about Greece is hard to watch, and must be nearly unbearable for Greeks themselves — but it is going to get even worse. Even if the current ‘bailout’ package is approved by the troika (EU/ECB/IMF), Greece is headed towards serious conflict and possibly even a military coup.

First, let’s be clear that the ‘bailout’ is not really a bailout of Greece, but rather of the mainly German and French banks. Why? Over the past decade, Germany kept domestic wages flat, helping it to run a massive trade surplus with Greece and other peripheral Eurozone (EZ) countries. These surpluses have been recycled by private banks lending to the periphery (pdf1 and pdf2), much in the same way as the 1973/79 oil surpluses were recycled largely through London in the form of highly profitable loans to Latin America. And just as Latin America (and other peripheral countries) suffered a debt crisis in the 1980s, while IMF-imposed austerity designed to repay the debt led to riots and trade union resistance, so we are witnessing much the same thing in the EZ. Nowhere more than Greece has troika-imposed austerity brought such pain, the country’s GDP having fallen by 15 per cent since early 2009 and unemployment affecting nearly half of all youth.

Now that EU banks have cut their exposure to Greek debt, Germany and others are having second thoughts about Greece staying in the euro.  Whether it happens in the coming weeks or months, a decision by the troika that Greece is in breach of its loan obligations could lead to the ECB halting its weekly refinancing operations with the Central Bank of Greece thereby forcing an immediate Greek default. It is generally agreed that if default leads to contagion in the EZ, the economic consequences for the EU could be disastrous.

Less satisfactorily examined are the internal political consequences of a Greek default. Greece is a relatively weak state, having been run since 1974 alternately by the two populist parties which retained power largely through patronage and corrupt practices: the centre-right New Democrats under the Karamanlis family and the centre-left PASOK under the Papandreou succession. The general election in April will almost certainly show these mainstream parties to be thoroughly discredited as a result of ‘austerity’, while in the wings await the Greek Communist Party (KKE) on the left and LOAS (Popular Orthodox Rally), the right-wing headed by the ultra-nationalist Georgios Karatzaferis. Each party has pledged to leave the euro.

Suppose Greece leaves the euro after the elections — a pretty safe bet since, even if a centrist coalition could be formed excluding the KKE and/or LAOS, it is difficult to see how it would govern effectively as the economy continues to deteriorate. The country’s exit from the euro would result in accelerating inflation for three reasons. First, new drachma (ND) would depreciate overnight making imports (including much food) far dearer. Also, the Greek banking system would need to be fully recapitalised. Finally, unable to borrow from the troika or in the financial markets, the government deficit, currently around 10% of GDP, would need to be refinanced in ND which could only be done by printing money. Devaluation followed by monetisation on a scale required to fund the deficit and recapitalise the banks would almost certainly lead to hyperinflation.

The missing piece of the puzzle in Greece is the army. Military spending runs at nearly 5% of GDP, or twice as high as the NATO average. Until quite recently, this aspect of ‘Greek profligacy’ has not been questioned by the troika, in part because the country imports its arms mainly from France, Germany and the US and in part because the military (much like the Greek oligarchy) wields enormous political clout.

The implication is clear. The troika’s actions in Greece are disastrous. Without a stable government, Greece’s departure from the euro will entail growing political chaos, and chaos will bring military intervention to ‘restore order’. Those old enough to remember the civil war of 1946-48 or the colonel’s coup of 1967 will remember that the West turned a blind eye to the repression which followed; thousands were tortured or killed and both the communist and social democratic parties were illegal for more than a generation. History may be about to repeat itself.