2012-06-14 13:10:01
ΠΗΓΗ: GUARDIAN
Who is responsible for the eurozone crisis? Can Germany fix it? Is a Grexit inevitable? What will happen after the election? You asked the questions and Greek economist Costas Lapavitsas responded
Why is Greece in such a catastrophic state? Who, between Brussels, the bankers, the politicians and the people, is really responsible? What's the least worst option: staying in the euro, or Grexiting?
For three years now, Greece's plight – and the international response to it – has dominated headlines. An estimated one-third of the Greek population now lives below the poverty line. Plummeting salaries and pensions, never-ending tax hikes and ever-deeper spending cuts have pushed the country to the brink of economic and social collapse.
Queues for the soup kitchens are lengthening; the numbers of homeless people are mounting daily; critical medicines are in increasingly short supply. Many Greek people are suffering as they have not suffered outside of wartime. Yet how much do we really understand of the reasons for this crisis – and the possible solutions to it?
As Greece heads into an election that could determine not just its own future but that of Europe's single currency and prospects for recovery, we asked you to send your questions to Costas Lapavitsas, professor of economics at Soas, radical and well-known media commentator, and author of Crisis in the Eurozone. He makes no bones about the fact that he believes Greece should cut its losses and withdraw from the euro, and also argues that broader European austerity is counterproductive and likely to lead to a longer and deeper recession and the end of the monetary union. Ultimately, he feels the people of Europe must gain democratic control over their financial institutions, and ensure they are restructured in the best interests of the people, not the banks.
In order to cover as much ground as as possible, your questions – nearly 100 of them – have been condensed into 10, which will, hopefully, address most of the issues and concerns you raised.
1 Who is mainly to blame for Greece's path to ruin – politicians, ordinary people, the policies of the EU and the eurozone or something else? To what extent is this purely a Greek crisis?
(Strathallen, Kafkandream)
Blaming Greece for the eurozone crisis has been a regular feature of public debate, often taking virulent forms – ie Greek people are dishonest and lazy, Greek politicians are corrupt, the country is backward and so on. There is no doubt that Greek society has deep problems, but as explanations of the crisis these arguments are puerile. Astonishingly, Greek officials have mouthed some of these stereotypes while negotiating with the EU.
The Greek path to ruin was determined by eurozone membership, similarly to other peripheral countries – Portugal, Ireland and Spain. The periphery adopted the euro hoping that it would lead to convergence with the more developed core. But the monetary union has structural flaws. Within its rigid framework, and faced with frozen German wages, peripheral countries lost competitiveness. Huge external deficits resulted, which were financed by borrowing from the banks of the core. Peripheral banks also took advantage of easy credit to expand domestic lending. By 2009 the peripheral economies were laden with vast debts – domestic and foreign, private and public – making them effectively insolvent. Core countries, reasonably enough, were reluctant to carry the costs of peripheral insolvency. This is the root cause of the eurozone crisis, and Greece is simply the most acute case of peripheral failure.
2 Surely the "troika" of the EU, the IMF and the ECB have a point when they blame Greece's problems on tax avoidance, cronyism and other forms of political corruption?
(Ianmc2, carpetsweeper, david119)
Far be it from me to deny the defects of Greek state, economy and society: widespread tax evasion; a tax system that favours big business and the rich; corruption in public procurement, including in medicine and armaments; malfunctioning labour markets with exploitation in the private sector and clientelism in the public sector; favouritism for big business closely linked to the state; inefficient small and medium enterprises that often avoid taxes; inequality and weak welfare provision. But let us be clear that the current predicament of Greece is not the result of structural weaknesses that have been with us for a long time. The country is on the brink of ruin because it chose to join a flawed monetary union. The euro has brought Greek defects into sharp relief, as it has done for other countries.
3 Why should anyone have sympathy with the Greeks, and what chances are there for genuine reform of the country?
(theAthensdog, Athena1947)
The Greeks do not need sympathy but support. This is truly a European crisis and, if the Greek disaster was resolved in the interests of working people, the rest of Europe would also benefit. There is no doubt that Greece needs root-and-branch change, but the necessary reform is unlikely to be delivered by the dominant social layers. They are precisely the people who do not pay taxes, have the closest connections with the state, possess extensive networks of patronage and are desperate to remain in the monetary union. Genuine reform in Greece must be led by the working people who pay their taxes meticulously and suffer from corruption and patronage. Greece's notorious aversion to paying taxes will be cured only if there is profound social and political change.
4 Do you think that the spectacular failure of the ECB and IMF to anticipate the European debt crisis was matched by a misdiagnosis of Greece's economic problems once the crisis began? And has the hair-shirt forced on Greece made things worse?
(Stoneman)
Policy-makers cannot claim much glory for predicting the European crisis, though there have been plenty of voices in the Anglo-Saxon world stating that the monetary union was built on sand. More than that, the policies of the "troika" (the EU, the IMF and the ECB) have made things worse. They include, first, austerity to reduce state exposure to debt and, second, structural adjustment to improve competitiveness. Both are failing and have exacerbated the crisis across Europe.
Austerity has led to lower public expenditure and higher taxes, thus reducing demand. Businesses have therefore faced difficulties, particularly as banks have also reduced the supply of credit. The result has been rising unemployment, falling consumption, and declining investment. The figures for Greece are reminiscent of war damage – unemployment of 22% and loss of output around 20%. As national income has shrunk, it has become more difficult to deal with public and private debt, not to mention collecting taxes.
Structural adjustment has crushed labour costs, while further liberalising markets and privatising public assets. Presumably private capital will take advantage of the new conditions, bringing dynamism to the economy. But cutting wages is unlikely to benefit peripheral competitiveness significantly, as long as Germany follows a policy of keeping wages low. Liberalisation and privatisation, on the other hand, will take years to have any effect, and even then it is debatable that they would meaningfully raise productivity. Meanwhile, the onslaught on the public sector has actually weakened the capacity of the state to collect taxes. Tax receipts during the past two months in Greece have been appalling. The country is a step away from being unable to pay wages and pensions in the public sector.
5 Have European policy-makers learned anything from the crisis? Why is Merkel stopping anything from happening?
(AdamDixon, stoneman, acrobat74, liberaljoe)
It is not true that policy problems have resulted from European politicians' inability to rise to the challenge. To be sure, neoliberal ideas are widespread within the EU establishment. In German universities and policy-making circles the old traditions of political economy are nearly extinct. Thinking is dominated by different versions of US academic economics, and the default mode is preaching the merits of free markets. This often includes placing the interests of lenders at the forefront and insisting that debts must be honoured at all costs: an attitude that is sometimes presented as defending the "sanctity of contract", or avoiding "moral hazard". The bottom line is that borrowers have been irresponsible and must carry the costs, while lenders should be allowed to escape, even if they have been reckless.
However, the German stance also reflects economic and political interests deep within the monetary union, particularly the combined influence of the exporting sector and the banks on policy-making in Berlin. German banks and German exporters have benefited substantially from the euro, even though the performance of the domestic economy has been undistinguished. They are keen to preserve the basic structures of the monetary union, indeed wish to impose harsher fiscal discipline and more labour flexibility. These policies are perceived as protecting the geopolitical interests of Germany, and hence the German government can argue in all seriousness that there is nothing structurally wrong with the monetary union. The problem is, apparently, to impose fiscal discipline and economic efficiency on the errant periphery.
6 Can the crisis be overcome with intervention by the ECB and other central banks printing money and by governments collectively borrowing and spending to get the economy out of the mire? Will a combination of such measures plus debt write-offs do the job?
(Helianthe)
The crisis has been allowed to fester for more than two years. To resolve it now would take a vast transformation of the monetary union. A Marshall plan would have to be adopted to raise productivity in the periphery. German economic policy would have to change, lifting wage restraint, boosting domestic demand and rebalancing the economy away from exports. The debts of the periphery would have to be restructured, or there would have to be sustained inflation to reduce the debt. The banking sector of Europe would have to be overseen by a transnational authority with the tax resources and power to shut banks down. A system of fiscal transfers would have to be created to allow for rebalancing trade deficits and surpluses within the union. It is hard to see how these changes could take place given the political structures of the EU. It is even harder to see them happening in time for peripheral countries.
7 Is the eurozone is about to collapse and might that be a good thing?
(Drahdiwaberl)
The eurozone is a flawed structure that has brought together countries differing greatly in competitiveness, welfare policy, labour market practices, banking performance and even economic culture and customs. There is no overarching state and, more significantly, no common European polity to support the common currency. A sharp division has emerged between core and periphery, which has become sharper as a result of the policies of the past two years. Germany is unwilling to make major sacrifices to rescue the monetary union: unsurprising given the wage restraint German workers have faced for years. The sums are likely to be huge, anyway, even for the German economy.
It is likely that the eurozone will begin to unravel, although it is impossible to anticipate the form that the unravelling might take. There could be a complete dissolution, or the creation of a "hard" euro surrounded by variants of national currencies. There could also be individual exits by countries in the first instance. Whatever its form, the unravelling of the monetary union would have enormous costs. It is absolutely vital to have a Europe-wide public debate on how to manage the process.
8 Could dissolution begin with a Greek exit? Would this imply the destruction of Greece?
(Timetorememberagain, stoneman, radu, kizbot)
From the start of this crisis, it was clear that a likely outcome would be Greek default and exit. The country cannot handle its vast debts, and nor can it successfully restructure its economy within the structures of the monetary union. Default and exit would have been the rational strategy in early 2010. Greece could have negotiated favourable terms for itself, the shock would have probably been less than the nightmare visited on the country since then, and by now the economy would be in recovery. Default and exit remain the only feasible way out, except that the pain will now be greater for Greece and less for the core of the monetary union.
Greek politicians need to formulate a plan B. With preparatory measures and popular mobilisation, the shock of default and exit could be lessened. There would have to be major public intervention at all levels, including nationalisation of banks, capital controls, administrative measures to secure supplies of oil, medicine and food, and protection for small and medium businesses. Greece can draw on the knowledge that has accumulated in dealing with such extraordinary crises, not least in Argentina after 2001. Once it is free of the trap of the monetary union, the country could begin to recover by taking advantage of its advantages in labour skills and other resources.
For the rest of the monetary union, Greek exit would be a shock economically and politically, no matter how prepared the EU policy-makers think they are. It could prove to be a Lehman moment for Europe given the tense and precarious state of the banking sector. But this is not a matter for the Greek people to resolve.
9 What would be the implications for people from Britain and elsewhere who own property in Greece?
(Lock)
The value of property in Greece is likely to drop substantially in euro, pound and dollar terms once the new currency was introduced. Those who bought now would suffer significant capital losses; those who waited and bought after the event would benefit. This is, unfortunately, a calculation that rich Greeks are also making, and hence capital exports have intensified, making things worse in the country. A lot will also depend on the attitude that a new government would adopt toward capital flows from abroad.
10 Greece is heading for repeat elections on 17 June. Could the leftwing Syriza party form the next government and what would that mean?
(Citygardens, keeptheredflagflying, sefertzi7)
The rise of Syriza is a very positive development in Greek and European politics, particularly in conjunction with the rise of the Left in France. The strength of Syriza reflects the widespread opposition to austerity during the last two years, involving rallies, demonstrations, civic disobedience, and so on. Syriza is riding the wave of anger and disillusionment with troika policies in Greece. It promises to reject austerity and structural adjustment, renegotiate the debt, but still remain within the monetary union.
Syriza increasingly looks like a political camp as well as a party of government. For this reason it has induced the emergence of an opposite camp, coalescing around the rightwing New Democracy, which basically accepts troika policies and hopes to tweak them a little. Greece is heavily polarised and will become even more so in the coming period.
Syriza might well come first in the elections, though it is impossible to tell whether it would have enough votes to form the government. It is probable that no party will be in that position, and some form of political horse-trading will then occur. Syriza will have a clear choice. It could abandon its pre-election stance and participate in a government that accepted troika policies. This would be catastrophic for Syriza politically but also for the country. Default and exit would not be avoided in the end, and the political beneficiary could well be the fascist right.
Or Syriza could refuse to participate in a compromise government and take whatever political actions necessary to support its programme. If that were to happen, there would be rising tension with the core countries of the EU, and Greece could soon be out of the monetary union. Greece would have to take its lumps, but Europe would also come face-to-face with the folly of a monetary union that is threatening the stability of the entire continent.
youpayyourcrisis
Who is responsible for the eurozone crisis? Can Germany fix it? Is a Grexit inevitable? What will happen after the election? You asked the questions and Greek economist Costas Lapavitsas responded
Why is Greece in such a catastrophic state? Who, between Brussels, the bankers, the politicians and the people, is really responsible? What's the least worst option: staying in the euro, or Grexiting?
For three years now, Greece's plight – and the international response to it – has dominated headlines. An estimated one-third of the Greek population now lives below the poverty line. Plummeting salaries and pensions, never-ending tax hikes and ever-deeper spending cuts have pushed the country to the brink of economic and social collapse.
Queues for the soup kitchens are lengthening; the numbers of homeless people are mounting daily; critical medicines are in increasingly short supply. Many Greek people are suffering as they have not suffered outside of wartime. Yet how much do we really understand of the reasons for this crisis – and the possible solutions to it?
As Greece heads into an election that could determine not just its own future but that of Europe's single currency and prospects for recovery, we asked you to send your questions to Costas Lapavitsas, professor of economics at Soas, radical and well-known media commentator, and author of Crisis in the Eurozone. He makes no bones about the fact that he believes Greece should cut its losses and withdraw from the euro, and also argues that broader European austerity is counterproductive and likely to lead to a longer and deeper recession and the end of the monetary union. Ultimately, he feels the people of Europe must gain democratic control over their financial institutions, and ensure they are restructured in the best interests of the people, not the banks.
In order to cover as much ground as as possible, your questions – nearly 100 of them – have been condensed into 10, which will, hopefully, address most of the issues and concerns you raised.
1 Who is mainly to blame for Greece's path to ruin – politicians, ordinary people, the policies of the EU and the eurozone or something else? To what extent is this purely a Greek crisis?
(Strathallen, Kafkandream)
Blaming Greece for the eurozone crisis has been a regular feature of public debate, often taking virulent forms – ie Greek people are dishonest and lazy, Greek politicians are corrupt, the country is backward and so on. There is no doubt that Greek society has deep problems, but as explanations of the crisis these arguments are puerile. Astonishingly, Greek officials have mouthed some of these stereotypes while negotiating with the EU.
The Greek path to ruin was determined by eurozone membership, similarly to other peripheral countries – Portugal, Ireland and Spain. The periphery adopted the euro hoping that it would lead to convergence with the more developed core. But the monetary union has structural flaws. Within its rigid framework, and faced with frozen German wages, peripheral countries lost competitiveness. Huge external deficits resulted, which were financed by borrowing from the banks of the core. Peripheral banks also took advantage of easy credit to expand domestic lending. By 2009 the peripheral economies were laden with vast debts – domestic and foreign, private and public – making them effectively insolvent. Core countries, reasonably enough, were reluctant to carry the costs of peripheral insolvency. This is the root cause of the eurozone crisis, and Greece is simply the most acute case of peripheral failure.
2 Surely the "troika" of the EU, the IMF and the ECB have a point when they blame Greece's problems on tax avoidance, cronyism and other forms of political corruption?
(Ianmc2, carpetsweeper, david119)
Far be it from me to deny the defects of Greek state, economy and society: widespread tax evasion; a tax system that favours big business and the rich; corruption in public procurement, including in medicine and armaments; malfunctioning labour markets with exploitation in the private sector and clientelism in the public sector; favouritism for big business closely linked to the state; inefficient small and medium enterprises that often avoid taxes; inequality and weak welfare provision. But let us be clear that the current predicament of Greece is not the result of structural weaknesses that have been with us for a long time. The country is on the brink of ruin because it chose to join a flawed monetary union. The euro has brought Greek defects into sharp relief, as it has done for other countries.
3 Why should anyone have sympathy with the Greeks, and what chances are there for genuine reform of the country?
(theAthensdog, Athena1947)
The Greeks do not need sympathy but support. This is truly a European crisis and, if the Greek disaster was resolved in the interests of working people, the rest of Europe would also benefit. There is no doubt that Greece needs root-and-branch change, but the necessary reform is unlikely to be delivered by the dominant social layers. They are precisely the people who do not pay taxes, have the closest connections with the state, possess extensive networks of patronage and are desperate to remain in the monetary union. Genuine reform in Greece must be led by the working people who pay their taxes meticulously and suffer from corruption and patronage. Greece's notorious aversion to paying taxes will be cured only if there is profound social and political change.
4 Do you think that the spectacular failure of the ECB and IMF to anticipate the European debt crisis was matched by a misdiagnosis of Greece's economic problems once the crisis began? And has the hair-shirt forced on Greece made things worse?
(Stoneman)
Policy-makers cannot claim much glory for predicting the European crisis, though there have been plenty of voices in the Anglo-Saxon world stating that the monetary union was built on sand. More than that, the policies of the "troika" (the EU, the IMF and the ECB) have made things worse. They include, first, austerity to reduce state exposure to debt and, second, structural adjustment to improve competitiveness. Both are failing and have exacerbated the crisis across Europe.
Austerity has led to lower public expenditure and higher taxes, thus reducing demand. Businesses have therefore faced difficulties, particularly as banks have also reduced the supply of credit. The result has been rising unemployment, falling consumption, and declining investment. The figures for Greece are reminiscent of war damage – unemployment of 22% and loss of output around 20%. As national income has shrunk, it has become more difficult to deal with public and private debt, not to mention collecting taxes.
Structural adjustment has crushed labour costs, while further liberalising markets and privatising public assets. Presumably private capital will take advantage of the new conditions, bringing dynamism to the economy. But cutting wages is unlikely to benefit peripheral competitiveness significantly, as long as Germany follows a policy of keeping wages low. Liberalisation and privatisation, on the other hand, will take years to have any effect, and even then it is debatable that they would meaningfully raise productivity. Meanwhile, the onslaught on the public sector has actually weakened the capacity of the state to collect taxes. Tax receipts during the past two months in Greece have been appalling. The country is a step away from being unable to pay wages and pensions in the public sector.
5 Have European policy-makers learned anything from the crisis? Why is Merkel stopping anything from happening?
(AdamDixon, stoneman, acrobat74, liberaljoe)
It is not true that policy problems have resulted from European politicians' inability to rise to the challenge. To be sure, neoliberal ideas are widespread within the EU establishment. In German universities and policy-making circles the old traditions of political economy are nearly extinct. Thinking is dominated by different versions of US academic economics, and the default mode is preaching the merits of free markets. This often includes placing the interests of lenders at the forefront and insisting that debts must be honoured at all costs: an attitude that is sometimes presented as defending the "sanctity of contract", or avoiding "moral hazard". The bottom line is that borrowers have been irresponsible and must carry the costs, while lenders should be allowed to escape, even if they have been reckless.
However, the German stance also reflects economic and political interests deep within the monetary union, particularly the combined influence of the exporting sector and the banks on policy-making in Berlin. German banks and German exporters have benefited substantially from the euro, even though the performance of the domestic economy has been undistinguished. They are keen to preserve the basic structures of the monetary union, indeed wish to impose harsher fiscal discipline and more labour flexibility. These policies are perceived as protecting the geopolitical interests of Germany, and hence the German government can argue in all seriousness that there is nothing structurally wrong with the monetary union. The problem is, apparently, to impose fiscal discipline and economic efficiency on the errant periphery.
6 Can the crisis be overcome with intervention by the ECB and other central banks printing money and by governments collectively borrowing and spending to get the economy out of the mire? Will a combination of such measures plus debt write-offs do the job?
(Helianthe)
The crisis has been allowed to fester for more than two years. To resolve it now would take a vast transformation of the monetary union. A Marshall plan would have to be adopted to raise productivity in the periphery. German economic policy would have to change, lifting wage restraint, boosting domestic demand and rebalancing the economy away from exports. The debts of the periphery would have to be restructured, or there would have to be sustained inflation to reduce the debt. The banking sector of Europe would have to be overseen by a transnational authority with the tax resources and power to shut banks down. A system of fiscal transfers would have to be created to allow for rebalancing trade deficits and surpluses within the union. It is hard to see how these changes could take place given the political structures of the EU. It is even harder to see them happening in time for peripheral countries.
7 Is the eurozone is about to collapse and might that be a good thing?
(Drahdiwaberl)
The eurozone is a flawed structure that has brought together countries differing greatly in competitiveness, welfare policy, labour market practices, banking performance and even economic culture and customs. There is no overarching state and, more significantly, no common European polity to support the common currency. A sharp division has emerged between core and periphery, which has become sharper as a result of the policies of the past two years. Germany is unwilling to make major sacrifices to rescue the monetary union: unsurprising given the wage restraint German workers have faced for years. The sums are likely to be huge, anyway, even for the German economy.
It is likely that the eurozone will begin to unravel, although it is impossible to anticipate the form that the unravelling might take. There could be a complete dissolution, or the creation of a "hard" euro surrounded by variants of national currencies. There could also be individual exits by countries in the first instance. Whatever its form, the unravelling of the monetary union would have enormous costs. It is absolutely vital to have a Europe-wide public debate on how to manage the process.
8 Could dissolution begin with a Greek exit? Would this imply the destruction of Greece?
(Timetorememberagain, stoneman, radu, kizbot)
From the start of this crisis, it was clear that a likely outcome would be Greek default and exit. The country cannot handle its vast debts, and nor can it successfully restructure its economy within the structures of the monetary union. Default and exit would have been the rational strategy in early 2010. Greece could have negotiated favourable terms for itself, the shock would have probably been less than the nightmare visited on the country since then, and by now the economy would be in recovery. Default and exit remain the only feasible way out, except that the pain will now be greater for Greece and less for the core of the monetary union.
Greek politicians need to formulate a plan B. With preparatory measures and popular mobilisation, the shock of default and exit could be lessened. There would have to be major public intervention at all levels, including nationalisation of banks, capital controls, administrative measures to secure supplies of oil, medicine and food, and protection for small and medium businesses. Greece can draw on the knowledge that has accumulated in dealing with such extraordinary crises, not least in Argentina after 2001. Once it is free of the trap of the monetary union, the country could begin to recover by taking advantage of its advantages in labour skills and other resources.
For the rest of the monetary union, Greek exit would be a shock economically and politically, no matter how prepared the EU policy-makers think they are. It could prove to be a Lehman moment for Europe given the tense and precarious state of the banking sector. But this is not a matter for the Greek people to resolve.
9 What would be the implications for people from Britain and elsewhere who own property in Greece?
(Lock)
The value of property in Greece is likely to drop substantially in euro, pound and dollar terms once the new currency was introduced. Those who bought now would suffer significant capital losses; those who waited and bought after the event would benefit. This is, unfortunately, a calculation that rich Greeks are also making, and hence capital exports have intensified, making things worse in the country. A lot will also depend on the attitude that a new government would adopt toward capital flows from abroad.
10 Greece is heading for repeat elections on 17 June. Could the leftwing Syriza party form the next government and what would that mean?
(Citygardens, keeptheredflagflying, sefertzi7)
The rise of Syriza is a very positive development in Greek and European politics, particularly in conjunction with the rise of the Left in France. The strength of Syriza reflects the widespread opposition to austerity during the last two years, involving rallies, demonstrations, civic disobedience, and so on. Syriza is riding the wave of anger and disillusionment with troika policies in Greece. It promises to reject austerity and structural adjustment, renegotiate the debt, but still remain within the monetary union.
Syriza increasingly looks like a political camp as well as a party of government. For this reason it has induced the emergence of an opposite camp, coalescing around the rightwing New Democracy, which basically accepts troika policies and hopes to tweak them a little. Greece is heavily polarised and will become even more so in the coming period.
Syriza might well come first in the elections, though it is impossible to tell whether it would have enough votes to form the government. It is probable that no party will be in that position, and some form of political horse-trading will then occur. Syriza will have a clear choice. It could abandon its pre-election stance and participate in a government that accepted troika policies. This would be catastrophic for Syriza politically but also for the country. Default and exit would not be avoided in the end, and the political beneficiary could well be the fascist right.
Or Syriza could refuse to participate in a compromise government and take whatever political actions necessary to support its programme. If that were to happen, there would be rising tension with the core countries of the EU, and Greece could soon be out of the monetary union. Greece would have to take its lumps, but Europe would also come face-to-face with the folly of a monetary union that is threatening the stability of the entire continent.
youpayyourcrisis
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