by Richard Eskow
http://ourfuture.org/20150205/13-questions-about-greece-europe-austerity-and-us?utm_source=progressive_breakfast&utm_medium=email&utm_campaign=pbreak
Every day brings more
headlines in the European debt drama: “Greece elects anti-austerity
government.” “Greek Finance Minister says he won’t negotiate with the
‘Troika.’” “Anti-austerity movements gain ground across Europe.”
What’s behind these stories?
What does the future hold? What, if anything, are the implications for the
United States? Here’s an overview of the situation as it currently stands:
1. What is “austerity
economics”?
Austerity economics is based
on the belief that healthy economies require lower government debt. Wikipedia
calls it “a policy of deficit-cutting, lower spending, and a reduction in the
amount of benefits and public services provided.”
Public services take a back
seat to spending cuts in austerity economics. Privatization is a big part of
the package, so government shrinks under an austerity regimen while
corporations seize greater control of the economy.
Tax increases may be
considered, but only when they’re used to pay down debt. In practice, austerity
economics benefits the financial and corporate sectors at the expense of public
sector items like education, pensions, medical care, and public transportation.
2. Does it work?
No.
2a. Please elaborate.
Austerity economics has become
the governing philosophy of the Eurozone. But studies show that it has made
economic conditions worse, not better. It has even increased government
deficits, despite the fact that deficit reduction is its raison d'être. (This International
Monetary Fund working paper
documents some of austerity’s failings.)
A “Devil’s Dictionary”
definition of austerity economics might be: the practice of starving a
population until it has enough to eat. The Eurozone’s financial leaders have
not, however, lost their enthusiasm for it – especially its most influential
leaders: the Germans.
3. Who has been most affected
by austerity?
Nations like Greece, Spain and
Ireland, which suffered grave losses after the 2008 financial crisis, have been
forced to borrow money under especially harsh conditions – with special
emphasis on government layoffs, privatization and reductions in social
services.
The results have been
predictably grim. Nevertheless, the Troika has decided to double down on a
failed policy.
4. What’s the “Troika”?
That’s the informal term for
the three bodies that have been managing debt on behalf of the European
Community: the European Central Bank, the European Commission, and the IMF.
The Troika (the word is sometimes
capitalized and sometimes not) is responsible for managing Europe’s debt
crisis. The name comes from the Russian
word for a harness that holds three horses, typically used for pulling
long-distance or luxury sleighs.
(Vehicles like that were
usually guided by coachmen with whips – which, in Europe’s case, is presumably
where the Germans come in.)
5. Why is austerity triggering
a political crisis in Europe?
A number of European countries
were forced to accept debt relief on terms that are unpopular with their own
citizens. That set the stage for clashes between debt authorities and the
democratically expressed will of the people.
In some ways this is a
uniquely European problem. When multiple nations share the same currency,
decisions may be made that are acceptable to the citizens of one (Germany, for
example) but not to those of others (e.g. Greece, Spain or Ireland).
6. Do we have a similar
problem in the United States?
[…] The United States has a
financial elite, too, as we’ve seen since the crisis of 2008. The undue
influence of Wall Street bankers (and their campaign contributions) has led to
some unpopular and harmful decisions here as well. Here, as in Europe, there is
ongoing tension between the democratic process and the power of the financial
elite.
That’s why the Senate
opposition to placing banker Antonio Weiss in a senior Treasury Department
position was so important: bankers already have too much control over economic
decision-making in our government.
(Then there’s the complicated
matter of the Federal Reserve – a topic for another day.)
7. What is Greece’s new
government trying to accomplish?
The Troika has imposed very
harsh conditions on the Greek people, and that has made the economy much worse.
This is especially unfair given the fact that the Greek people didn’t choose to
incur this debt – and they certainly weren’t the bank officers who extended the
credit.
The widely respected financial
journalist Martin
Wolf notes that the enormous sums loaned to Greece “went
overwhelmingly not to benefiting Greeks but to avoiding the writedown of bad
loans to the Greek government and Greek banks.” Only 11 percent was used to pay
for government services.
The Greek government is
attempting to reduce the amount of debt it owes. That is not just a fair and
reasonable idea: it’s a practical necessity. Finance reporter Mike
Bird does a good job of laying out the facts: no government could meet
the expectations now placed on that country.
While Greece’s leaders are
called ‘radical’ and ‘impractical,’ it is Europe’s financial leaders who are
making unrealistic demands. Greece’s leaders are trying to break the impasse.
They were initially asking for a “haircut” – reducing the amount owed to
creditors – but that has become a politically charged idea. So the Greek
Finance Minister has come up with an alternative proposal that essentially does
the same thing without forcing the Troika or Germany to back down.
8. Are Greece’s new leaders
“radical”?
The leaders of the governing
Syriza coalition have been called
that, but their economic ideas reflect mainstream thinking of the last 75
years or more, since the heyday of the late John Maynard Keynes. (Keynes died
in 1946.)
Some conservative economists
of the late 20th century revived and revised older ideas about the
infallibility of the free market, but their theories were effectively disproven
by the crisis of 2008. Nevertheless, those theories appear to drive the demands
now being placed on Greece.
Syriza’s broader platform
promised “four pillars of national reconstruction”: “confronting the
humanitarian crisis,” “restarting the economy and promoting tax justice,”
“regaining employment,” and “transforming the political system to deepen
democracy.” These ideals would be considered admirable, and not extreme, by
most Europeans (and Americans) of the last 50 years.
If Greece’s leaders appear
radical to some, that is partly a matter of style. Many people in the financial
world are unaccustomed to having their ideas or demands directly challenged,
even when they’re presented in an undemocratic or autocratic fashion. It upset
some people, for example, when Syriza economic spokesperson (now Finance
Minister) Yanis Varoufakis characterized Germany’s policy toward Greece as
“repeated fiscal waterboarding” – but it was a pretty apt description.
Varoufakis has also shown up
to meetings as Finance Minister wearing a leather jacket, so there’s that.
9. Why are Greece’s leaders
facing such strong resistance – from the Troika, from Germany, and the leaders
of some other European nations?
Because the stakes are high –
not just for Greece, but for the entire Eurozone. Both sides are in something
of a high-stakes faceoff: If Greece’s leaders can’t secure new lending terms
they could be forced to choose between a bank collapse, leaving the Eurozone,
or reneging on their own promises. None of those choices are attractive.
But the options aren’t good
for the Europeans either. A Greek exit from the euro (they’re calling it a
“Grexit”) would cast a shadow of doubt over the euro’s viability. Moody’s and
other observers have concluded that a “Grexit” would also lead to a recession in
Europe.
If the Greeks win major
concessions, on the other hand, that will embolden other nations to seek
similar deals – which could, in turn, roll back the austerity regime now in
place across Europe.
Many of us would see that as a
good thing, but the leaders of the Eurozone presumably would not.
10. What other countries have
anti-austerity movements?
Spain has a new and growing
political coalition called Podemos (“We Can”) that resembles Greece’s Syriza in
both structure and platform. Like Syriza, Podemos formed after a public
anti-austerity movement held major demonstrations. Polls have shown a
major shift in support toward Podemos in recent months, and a Podemos
rally in support of Syriza drew 100,000 supporters in Madrid last week.
Portugal, which was rocked by
anti-austerity demonstrations in 2012 and 2013, is considered fertile ground
for an anti-austerity movement if Syriza succeeds.
Demonstrators turned out in
Ireland last week to protest one of that nation’s austerity measures, a new fee
for water usage. The fee had symbolic value, since water had been proclaimed a
human right by the first president of the Irish Republic. A new political coalition,
the Anti-Austerity Alliance, has been formed and has won several by-elections
but has yet to face a major electoral test.
Anti-austerity riots erupted
across Italy in November
of last year. An idiosyncratic political party there, the Five Star Movement,
has grown rapidly. It captured a significant number of votes in 2013
legislative elections and in 2014 voting for the European Parliament. The Five
Star Movement describes itself as “Euroskeptic” and is presumably sympathetic
to coalitions like Syriza and Podemos.
11. Is there a “moral hazard”
in all of this?
Sure. When somebody takes a
risk and is not forced to take full responsibility for it, financial and
insurance experts say that creates a “moral hazard” by rewarding (and therefore
encouraging) irresponsible behavior.
Critics of the anti-austerity
movement say they’re concerned about the moral hazard that might be created if
the Greek (or Spanish, or Irish, or Portuguese) people aren’t forced to pay
their debts. But these populations have suffered and sacrificed quite a bit
already. At what point is their side of the ledger wiped clean, especially when
others incurred these debts on their behalf – and when those debts have
primarily been used to rescue bankers?
The Irish people didn’t create
the housing bubble that decimated their economy. Nor did they know that, after
it burst, the European Central Bank secretly
pressured the Irish government to accept a bailout and assume obligation
for the funds being given to Irish banks.
The Greek oligarchy is filled
with notorious tax evaders, but the Syriza government has promised to crack
down on them. And while some of Greece’s creditors have already taken a
“haircut,” it is the financial community – not ordinary citizens – that is
expected to understand risk and underwrite loans accordingly. As Martin Wolf
put it, “creditors have a moral responsibility to lend wisely.”
The lesson? Nobody likes moral
hazard – but there is disagreement about where it lies.
12. What will happen in
Europe?
A lot of speculators would
love to know the answer to that question. The relevant markets have been rocked back and forth (and back again)
since Greece’s elections. The Greek government has taken a more conciliatory
stance in the last few days by reframing
its “haircut” demands in softer terms, agreeing to operate at a surplus
going forward, and even offered to backtrack on some of its campaign promises.
But the Greeks are still
committed to changing their government’s debt obligations to more closely
reflect the democratically expressed will of its people. Perhaps as a result,
Germany’s leaders have failed
to respond to Greece’s overtures with their characteristic warmth.
They’ve even tried to make Greece’s life more
difficult.
One suspects it’s all part of
the posturing. The Eurozone must still deal with the underlying tension between
a single currency and multiple democracies. And it must somehow work to keep
Greece in the euro.
Some sort of compromise still
seems all but inevitable. Otherwise, as Paul
Krugman puts it, the German position is “basically crazy” and “all
assertions that Germany understands reality are proved wrong.”
That outcome, however
unlikely, remains a possibility.
13. What’s next for the United
States?
Here at home, the banking
industry is working overtime to roll back the modest regulatory changes
contained in the Dodd-Frank financial reform bill. Austerity forces in this
country, while less powerful than their European counterparts, have already
enacted spending cuts that created significant “fiscal
drag.“
Wall
Street has a number of willing allies on the Democratic side, and
the Republican Party seeks its approval with tail-wagging eagerness. It will be
hard to change this state of affairs until we reform our system of campaign
financing. That means we remain at risk for additional austerity measures.
But there is also a growing
populist movement, both inside and outside the political system. Leaders like
Sens. Elizabeth Warren, Bernie Sanders and Sherrod Brown are likely to keep
resisting Wall Street’s unwholesome influence on our democracy. Even some of
the Democratic Party’s key economic “insiders” have moved a little further to
the left on matters of government spending and wealth inequality.
With every day that passes,
however, it’s less likely that any major banker will be prosecuted for the
major acts of fraud committed in their institutions. There’s a lot of moral
hazard going around these days.
13a. We’re lucky we don’t have
anybody like the Germans pushing austerity in this country.
