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  • Published in Analysis
Jeroen Dijsselbloem (left) and Yanis Varoufakis spoke at a rather frosty joint press conference

Jeroen Dijsselbloem (left) and Yanis Varoufakis spoke at a rather frosty joint press conference. Photo: EPA

The Syriza government has begun to reverse austerity despite opposition from Europe's elite. James Meadway looks at the backround for the opening battle with the EU/ECB/IMF 'Troika'

Last Sunday’s election victory by Syriza has shaken up European politics like nothing else since the eruption of the debt crisis in late 2009. In its first full day in office, the new government has announced measures to reverse the harsh austerity that has seen real wages fall by a third in the last few years. Pensions are to be restored, sacked workers reinstated, and privatisation halted. Meanwhile, tense initial negotiations have opened up between the Greek government and the EU on winning debt relief and an end to austerity measures.

At stake here, in the first instance, is the possibility of a debt “restructuring”, or write-off, for Greece. Greece has already had a write-off of some of its debt, under the European Central Bank's guidance, back in 2012, in return for continuing austerity. This write-off was too small to make any difference - its debt, relative to the size of its economy, is still rising. Alexis Tsipras has said he wants to see at least a third written off, although many economists would suggest a much deeper cut – perhaps of 50% - would be needed to bring the situation truly under control. It may be possible to change the terms of the debt so that (for example) Greece only has to repay when the economy is growing. (Syriza's finance minister, Yannis Varoufakis, is arguing for this.) This would reduce the immediate burden, but potentially at the cost (if the deal is unfavourable to Greece) of extending the period over which debts would be repaid. Syriza and its supporters, on current showing, would not be happy with anything less than a reduction in the real burden.

Who benefits? Who suffers?

The first question to consider, when thinking about not paying a debt, is: who is the creditor? Who is the debt owed to? A debt write-off can be good for the debtor, since they no longer have to pay the debt, but bad for the creditor, since they were expecting to get the debt repaid with interest. It’s like the old saying: owe a bank £100, and that’s your problem. Owe a bank £100m, and that’s the bank’s problem. At the heart of the European debt crisis (not just Greece) was the problem that much of southern Europe's debt was owed to northern European banks, in France and Germany especially. If southern Europe had failed to pay, these banks would have collapsed.

What's happened over the last few years with Greek debt, as a result of the EU/ECB/IMF "Troika" intervention, is that Greek debt is now mostly owed to public institutions. In 2011, about 36% of Greek debt was owed to public institutions, in this case mainly the IMF and ECB. By 2015, after assorted “bailouts” totalling 246bn euros, the ECB and the IMF, joined by the ECB’s European Financial Stability Fund (EFSF) now hold 85% of Greek debt.

Syriza says it will only be looking to write-off debt owed to public institutions, not the private sector. They have also said they will not touch the IMF debt. This leaves only the debt owed directly to the ECB or the EFSF to negotiate over.

And just to be clear on the so-called “Greek bailout”: of the 246bn euros loaned to the Greek government, less than 10% has been spent by the Greek government. The rest - all 90% - has been used to repay Greece’s creditors. Greece was not bailed out. The banks were. But we called it a “Greek bailout” to spare the EU’s blushes.

The outcome of this process, of paying off private loans with public loans, has been to shift the balance of Greece’s debt towards public institutions. Of those public institutions, now holding about 246bn in total, the bulk sits with the EFSF. Germany is the biggest single contributor into this fund, having loaned 56bn, followed by France (42bn) and Italy (37bn). Should Greece have its debt written off, these creditors will take the hit.

Syriza’s demands are easily affordable

But the sums, as throughout all of this, are not that great when compared to the size of the economies involved. Germany’s loan to Greece is equivalent to 1.4% of German GDP. Syriza’s entire emergency spending programme comes to just 12bn euros – 5% of the cost of the “bailouts” over the last few years. Greece itself is just 5% of the whole eurozone economy.

And, in addition, the ECB is a very large, powerful institution that is supported by all the eurozone members. It has just announced its own "quantitative easing" programme, like the one we have in the UK, which involves electronically creating 1.1trillion new euros over the next year or so. If it can create its own money like this, writing off the Greek debt should not be a problem - if you can print money, why care about debt repayments from elsewhere? You can simply pay off the debt.

Yet the negotiations, the first round of which are closing as I write, have been fraught. Helena Smith reports from Athens:

'Send off for Joren Dijsselbloem ended with an incredible stand-off as Varoufakis socked him one over the troika. The Dutchman looked enraged, bending forward to whisper something in Varoufakis’ ear to which the Greek finance minister did not respond. Greek finance ministry staff standing behind me said “Oh my God.”

One said “I wonder if this is the time to pack my bags.”

Throughout the press conference you could almost feel the electric tension in the air.'

The EU’s representative refused to budge, and the Greek delegation has refused to compromise. The Greek’s intransigence is understandable – indeed, laudable. The EU’s side is less explicable. So far, not one of the Troika members has offered so much as an olive to Greece, never mind a whole branch. There are two reasons for this.

First, there is the power of a good example. Greece is a small economy. The crisis could be resolved there immediately, at minimal cost. But if Greece wins a write-off, and is allowed to fund its spending programme, other countries will argue for the same. Syriza's closest ally outside of Greece is Podemos in Spain. They also argue for an end to austerity in Spain, and for debt write-offs. However, Spain is fourth-largest economy in the eurozone. A write-off there will be expensive. So the German and other northern European governments are keen to avoid a write-off for Greece because it will spark off similar demands elsewhere. For their part, the mainstream parties in Portugal and (especially) Spain fear losing power to anti-bailout contenders. All the old political forces of Europe, in other words, are lined up against Syriza.

Second, and following on from this, a debt write-off for Greece implies a radical restructuring of the whole euro project, at least. Syriza’s leadership know this; that’s why they’re arguing for it. They think a reformed EU and eurozone can be won out of the current mess. But with Europe’s elites now committed to a particular vision of European integration, of which the euro was intended as simply one more step on the way, a change of direction from the line of march established by at least the 1992 Maastricht Treaty is inimical. A serious write-off of Greek debt holds out the prospect of turning the tide back on Europe’s own version of neoliberalism, right the way across the continent.

QE does not resolve the problem. Creating new money is not cost-free: every euro created, either by the ECB or within the European banking system, is ultimately a liability of the ECB. The euro works as money because the ECB agrees to stand behind it and reassure people of its value. But because it is a liability, it must bear ultimately responsibility for preserving that value, and this is why Germany (especially) has been very concerned to avoid QE, and to avoid debt write offs. The German government believes (basically correctly) that the ultimate costs of QE will fall on its own shoulders, as the largest economy standing behind the ECB. As a result of these concerns, the QE that has been implemented is flawed, and itself contains the potential for the eurozone’s future break-up.

In other words, the reasons for the opposition to Syriza’s demands are now no longer economic, in the sense that they will impose a cost on private institutions, particularly eurozone banks. From 2009-2012, that was the major issue: that any move to seriously write off Greek debt ran the risk of precipitating a massive financial crisis as banks became insolvent, and collapsed. Since then, at vast expense, that problem has been resolved by transferring the burden of debt onto the public sector. The collective public of the euro is more than able to bear the cost of a Greek write-off – not least if this spares them the further, future costs of an outright collapse. But Europe’s Old Guard don’t want to budge on Greece, lest it any weakness now opens the floodgates in the future. The crisis is no longer strictly economic. It is now vey much political.

The clock is ticking

Currently, emergency funding for Greece is due to expire on 28 February. The Greek government has said, so far, that it will not be seeking an extension of the funding, since the funding comes attached to austerity. This sets a deadline on negotiations. If negotiations with the ECB and the other Troika members fail, Syriza has said it is committed to carrying out its spending programme. If this happens, with debt repayments due over the next few months, Greece will default - refuse to pay - its debt, prioritising domestic spending instead.

If that, in turn, happens, there will be little point remaining inside the euro, although the Greek government may attempt to negotiate the terms of the exit. It would be a serious mistake to try and remain inside the euro whilst the government is in default, since continued euro membership would leave control over monetary policy and Greek banks in the hands of the ECB. Greek banks are insolvent and dependent on ECB funding; if this was cut off, they would collapse immediately. If the Greek government could print its own money, it could use this new money to prop up the banks, but that is not an option inside the euro (although some clever fudges are available, including the government issuing "scrip" - basically IOUs promising to pay euros in the future).

Deals and disputes

This possibility remains, as yet, unlikely, not least because official, hardline position from the Troika is now under serious pressure. Until very recently, the consensus line in mainstream circles is that without an agreement on continuing austerity and extending the bailout programme, Greece will be left high and dry. However, as the letter from leading economists in last week’s Financial Times indicated, that consensus may now be breaking up. What seems to be emerging, following the cue of former IMF Europe director, Reza Moghadam, is the suggestion that Greece should have its unpayable debt written off, perhaps to a substantial extent – Moghadam suggests a 50% write-off. But that in return for this, Greece will continue to implement its structural “reforms”: privatisation, lay-offs, and wage cuts, designed to restore “competitiveness”. Martin Wolf in the Financial Times, and The Economist have both come out broadly in favour of this approach, and Bank of England Governor Mark Carney’s intervention point in the same direction. Reports in the Greek press, meanwhile, suggest that Barack Obama phoned Tsipras earlier this week to inform the Greek PM that he, too, opposed excessive austerity.

This programme, in other words, would see a reduction in Greece’s debt burden, but no immediate change to the demands for austerity and “structural reform”. It’s possible, with debt reduced to a presumably stable (if still high) level, that austerity, rather than stretching as under current Troika projections until mid-century, could be somewhat foreshortened. It would represent a compromise with Syriza’s programme, and a recognition that its main economic claim was, in fact, basically correct.

But it is inadequate as a solution to the domestic crisis in Greece. The overwhelming problem there has been a slump in demand: people have much less money, while the government is spending its money repaying debts. Without spending, no-one can sell. And if no-one can sell, the economy gets dragged into a recession – of exceptional severity, as we have seen.

The so-called “reforms” intended to “restore competitiveness” merely extend this problem. The proposals often cite the IMF’s “Heavily-Indebted Poor Country” (HIPC) initiative, which from 1996 has been the mechanism under which the old “Third World” debt of mainly African nations has been written off – in return for the now-familiar “structural reforms”. But these reforms, in the first instance, result immediately in a loss of domestic purchasing power – if you remove subsidies, and force down wages, and cut government spending, you shrink domestic spending. That loss can be mitigated when a country has its own currency, since the currency can devalue, making exports cheaper and so, potentially, boosting demand for a country’s output. This is still less than ideal – a falling exchange rate will turn into rising import prices, initially at least – but at least some of the burden will be eased.

The exchange rate can act like a safety valve. Trapped inside the eurozone, Greece has no such option. Greece has been forced into an “internal devaluation”: desperately cutting every cost to try and compensate for the excessively high exchange rate. But this “devaluation” means, in practice, a massive restriction on spending in the domestic economy by everyone: households, governments, and firms. If debt is written off but this write-off is not used as an opportunity to build up domestic spending, the Greek economy will not recover. It will remain trapped in a desperate race to the bottom.

Support domestic demand

Far better, then, to treat the need for “structural reform” as an opportunity to shift the Greek economy out of the hands of the bankers and oligarchs, and for the benefit of ordinary Greeks. That would mean, exactly as Syriza argue, both increases in the minimum wage, job creation, and restoring pensions, alongside tackling chronic evasion and graft by, in particular, Greece’s elite. Varoufakis has vowed to “destroy” the oligarchs, the ultra-rich families who dominate Greece’s economy, and, if he and Syriza are successful in bringing some order to the tax system, there can be a huge transfer of wealth and resources towards the rest of Greek society. It will be a huge task; since the fall of the dictatorship in 1974, no government has ever successfully tackled the issue. But there is an opportunity now to do so, as part of a programme intended to transform how the Greek economy functions. That will mean a decisive break with the failures of the last few years – not their extension.

James Meadway

James Meadway

Radical economist James Meadway has been an important critic of austerity economics and at the forefront of efforts to promulgate an alternative. James is co-author of Crisis in the Eurozone (2012) and Marx for Today (2014).

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