Greek economy tremors shake eurozone foundation

The economic crisis in Greece is sending shockwaves through Europe’s financial and political infrastructure. The threat of debt default has fuelled feverish speculation on bond markets. The only issue on which the EU and Greek political establishment agrees is that the working-class will have to pay through savage cutbacks. This, in turn, is sparking social upheaval. Greece, currently the weakest link in a series of weak eurozone links, has triggered a severe crisis for the common currency. The euro crisis, moreover, will have a serious impact, not merely on the eurozone, but for European capitalism as a whole. The spectre of Greece defaulting on its debts is pushing up the cost of borrowing for other heavily indebted countries, like Spain, Portugal, Italy and Ireland. A Greek default (even though Greece accounts for only 2.5% of the eurozone GDP) would pose the question of the viability of the euro as a common currency. A breakup of the eurozone, which is now being seriously contemplated by some of the strategists of capitalism, would also provoke a convulsion in the world finance and currency system.

For a start, a Greek default could cause the collapse of some of the European banks holding Greek government bonds (totalling about €300bn), provoking a new phase of crisis in the global banking and financial system. Greece is the trigger, revealing the contradictions inherent in the common currency. When the global banking/financial system faced meltdown in 2008, the major capitalist powers stepped in with an estimated $18 trillion of capital injections and guarantees. They effectively nationalised the losses of speculative investment banks. At the public’s expense, they rescued banks and other speculative vehicles from the consequences of their own reckless gambling on global markets. Now, however, the major EU powers are refusing to guarantee a mere €300 billion of Greek debt. They are promising ‘solidarity’ with Greece, which is intended to reassure the financial markets that they will not allow a default. However, they have so far refused to come up with a concrete package of financial support. At the same time, they are demanding more and more savage cuts from the Greek government – cuts to be imposed on the Greek working class. To reduce the current budget deficit to 3% of GDP (the EU’s Economic and Monetary Union ‘norm’), would require a cut in GDP of between 12-15%, which would have the effect of a major slump in the economy.

The ‘reforms’ demanded by the EU powers, led by German capitalism, have been called appropriately a ‘tsunami of attacks’. Cuts on the scale now being proposed would savage social services and bring huge increases in taxes, beginning with VAT. Moreover, these misnamed ‘reforms’ are being put forward by a ‘socialist’ (PASOK) government of George Papandreou. However, the tsunami has already been met by ‘rivers of fury’, with a series of massive, nationwide strikes and protests. "The bureaucrats in Brussels want… to see blood on the streets of Athens", wrote one mass newspaper. "We are at war with the government", commented a former left MP, "because it is clearly at war with us". "Why should I as a worker pay for the errors in policies?" asked one teacher on a public-sector demonstration. "The worker can’t be the scapegoat. So we have to defend ourselves". A few capitalist commentators, however, are warning that cuts on the scale now being proposed in Greece will cause an explosive social and political reaction, not just in Greece but throughout Europe. "If you tighten the way the markets seem to want, you will get a political response that is nonviable", commented Joseph Stiglitz, an economist who advocates Keynesian policies. "These are democracies – not dictatorships".

The events in Greece, which will be echoed in Spain, Portugal, Ireland and elsewhere, mark a new period of social revolt and political struggles that will reverberate around Europe. Greece is one of the weakest of the European capitalist states. Its accumulated national debt is almost €300 billion, about 112% of GDP – and this is expected to rise to 130% by 2013, unless there are savage cuts in spending combined with tax increases. Moreover, the current debt may be even higher than it appears in the national accounts, due to the use of various complex financial instruments designed to hide the real level. The huge mountain of debt has been accumulated through the gross mismanagement of successive governments, and has certainly not benefitted the Greek working class. There is massive tax evasion, for instance, among the wealthy and even the prosperous middle class. Only workers, who have their tax deducted at source, actually pay official levels of tax. It is estimated that the government loses €30-40 billion a year through tax evasion. Corruption is rife throughout the state bureaucracy.

Greece was hit hard by the global recession, with a 1.1% fall of GDP last year and an estimated 1% fall coming during 2010. The slump has resulted in mass unemployment, especially among the youth. Greece’s national debt was accumulated over a period and was no secret. However, the debt crisis was provoked in December when the Fitch rating agency downgraded Greek bonds from A-minus to BBB. This pushed up the rate of interest the Greek government had to pay on its bonds to almost 7%, 3.8% above benchmark German government bonds. The ‘bonds market vigilantes’, the big global bond traders, began to raise the spectre of a default by the Greek government. This inevitably raised similar doubts on financial markets about other heavily indebted economies, particularly Spain, Portugal and Italy. The Eurozone conomies have been severely hit by the global downturn. There was a fall from peak to trough of -5% (compared, for instance, with a 3.8% fall in the US economy). The latest figures for the fourth quarter of 2009 show negligible growth in the biggest economies, Germany and France, with continued negative growth in the peripheral countries: Portugal, Italy, Greece and Spain, unflatteringly known as the PIGS – or PIIGS if Ireland is included.

The eurozone downturn has been exacerbated by the common currency. The rise in the value of the euro during the downturn (mainly because of the decline of the US dollar), raised the export prices of euro economies when there was a sharp fall in world demand for exports. At the same time, the divergence between the eurozone economies is now threatening a deep crisis for the euro itself. Germany, the Netherlands and France, for instance, have been able to implement debt-finance stimulus packages. The debt-laden PIGS, however, do not have that luxury, as the ‘markets’ (ie banks and speculators) are not prepared to tolerate Keynesianism in the weaker economies.


At the same time, the euro yokes economies with large current account surpluses (for example, Germany, the Netherlands) with economies with big current account deficits (the current account is the trade balance plus current payments, such as repatriated profits). With separate currencies, the currencies of surplus countries would tend to appreciate while those of the deficit countries would decline, tending to correct the imbalances. This is not possible within the one-size-fits-all eurozone.Portugal, Italy, Greece and Spain are all to varying degrees heavily laden with debt, whether in the public sector, the business sector, or household indebtedness. Greece is currently running a budget deficit of 12.7% and an accumulated national debt of €112 billion. The boom time growth in Spain and Ireland, moreover, was heavily dependent on housing bubbles, which have now deflated. The peripheral economies took advantage of low eurozone interest rates and cheap credit to finance their debt-driven growth. Although every government issued its own bonds, the apparent ‘security’ of the euro enabled them to borrow money at lower interest rates than otherwise.

As separate economies, governments of whatever complexion might have raised interest rates to try to curb the growth of bubbles. In the eurozone, however, the European Central Bank (ECB) set a common, low rate which particularly suited larger economies like Germany. The prevalence during the previous upswing of low interest rates and a high euro, which favoured surplus exporters like Germany, the Netherlands and France, encouraged profligate spending and borrowing in the weaker economies.

The crisis in the eurozone’s periphery is not an accident: it is inherent in the system. Under the EU’s Economic and Monetary Union (EMU) and ‘stability pact’, current deficits are limited to 3% of GDP, with national debt limited to 60%. It was widely suspected when Greece entered the eurozone in 2001 that the government cooked the books to meet the ‘convergence criteria’. With the onset of crisis, however, the EU Commission, the ECB and, ultimately, the major eurozone powers (Germany and France) were forced to accept much higher levels of deficit and national debt not least because they exceeded the norms themselves. This highlights the basic contradiction of the eurozone: the 16 countries are participating in a currency union, but without the basic elements of a political union. There is no centralised economic power capable of keeping the different national economies within the norms required by a stable euro currency. The EU Commission and ECB have periodically admonished national governments for breaching the rules, but have been effectively powerless to curb their expenditure.

There are no eurozone institutions, for instance, with powers similar to the International Monetary Fund (IMF). If it is called in to support a floundering currency, the IMF has draconian powers of surveillance, and has imposed draconian conditions for loans. This is why Merkel, Brown and others now favour the intervention of the IMF in Greece. By turning to the IMF, however, the ECB and eurozone would signal their own weakness. In fact, such a move could further undermine the euro. Now, however, faced with the prospect of a breakup of the eurozone, the key economies, particularly Germany, are demanding savage cuts from Greece and the other peripheral economies. This is the price they will try to exact for preventing a default by the Greek and other governments. The major eurozone powers, especially Germany, are averse to specifying a rescue package for Greece. They have confined their support to vague promises of ‘solidarity’ in the hope that this will reassure financial markets. As the International Herald Tribune comments (6 February): "There is still a game of chicken among sovereign states, with Greece counting on help and other countries holding back until Athens pays a steep price for its profligacy and manipulation of statistics".

"It’s highly unlikely Greece will be allowed to default", economist Antonio Missoroli commented. "But no one wants to say that out loud to take the pressure off the Greek government. So it’s a fragile balancing act, how much pressure can you exercise on Greece and how much can it bear?" Another commentator, Simon Tilford, said that "the EU wants to humiliate the Greek political establishment and to see them taking difficult decisions". This is a dangerous game. A Greek default, under pressure from financial markets, could trigger a domino effect throughout the eurozone. Yet even after the European summit on 10/11 February, the subsequent meeting of European finance ministers on 15 February demanded even bigger cuts. This was despite the Greek government’s promise to cut its deficit by four percentage points to 8.7% of GDP by the end of this year – in itself a savage and politically explosive reduction.