This guest blog, written by Konstantinos Todoulos, originally posted on the Jubilee Debt Campaign website, offers an impressively clear picture of the real story behind the Greek debt crisis.
Top 5 questions about the Greek debt crisis
With the Greek debt crisis still dominating the headlines, Konstantinos Todoulos answers 5 frequently asked questions.
"The Greek crisis is the result of trying to shield bankers and bondholders while asking workers, retirees and taxpayers to pay the bill" (Dani Rodrik, economist, Harvard University)
1) What is the current situation in Greece?
The Greek external debt (money owed to international lenders) is around €356 billion, the debt-to-Gross Domestic Product (GDP) ratio currently stands at 161.8%. It is projected to go up to 172% by the end of 2011 and 194% by 2012 - that is over €370 billion euros. By comparison, the UK's debt-to-GDP ratio is 89%. The economy has suffered greatly, both in terms of industrial production and services, with the GDP reduced in the years 2010-2011 and with many enterprises and businesses closing down or drastically cutting down on activity and personnel. Official calculations reveal that the economy is currently contracting by 8.5% of GDP - down from 10.5% in 2010 - but short of the 7.6% target set by the EU and IMF in return for emergency loans. The threat of impending default on payments triggered capital flight, as a fifth of all bank deposits by big capital holders have been directed to 'safer' banks mainly to Switzerland and Germany. Taxation on big capital and financial institutions is fairly low, as big capital holders and enterprises have been largely ignored from the recent taxation spree. At the social level, the official unemployment rate is at 16.4%, with over one million people unemployed in a country of 11 million. The Greek labour market is scourged by informal, seasonal and flexible work, as job availability has been drastically reduced in the private sector and the government pledged to hire only one new employee for every 10 that retire in the public sector. The youth of Greece, who are generally skilled and highly educated, suffer a lot in these conditions: unemployment for the ages 18-24 is at a record 35%, house ownership is not an option for the majority and many are considering migration as a solution. This depression creates all sort of problems in daily life, from a rise in destitution and poverty to psychological problems and a rise in suicide rates.
2) What has been done so far?
The International Monetary Fund (IMF), the European Union (EU) and the European Central Bank (ECB) jointly formed an unofficial body nicknamed the ‘Troika’, in order to resolve the Greek debt crisis. They offered to lend €110 billion last year in tranches (installments) at intervals of several months, with evaluation of the implementation of economic reforms demanded in response.
The Troika has already provided loans for the payments of the loan interests and support of the bank system of €65 billion in 5 tranches since May 2010. It agreed at the Eurozone summit on 21 July 2011 to give another €109 billion euros within the next few years. At the same time, they decided on a reduction or ‘haircut’ of the debt by 21% and institution of the EFSF (European Financial Stability Facility), a permanent fund for future guarantees provided for countries in the Eurozone. However, efforts to limit the deficit and restore development have proven futile, as the global financial crisis has made matters worse. The measures not only did not produce positive results but weakened Greece and made it a liability for the whole Eurozone. The scale of European banks' exposure to Greek bonds is such that a collapse in the Greek banking system would endanger the whole European economic structure. That's why on 27 October a new deal was reached, involving a ‘haircut’ of 50% on private debt, in return for the Greek government pushing the austerity policies even harder. However, this is still not enough to tackle the underlying problems with the debt burden, and may itself now face the uncertainty of a referendum.
3) Who and what are responsible?
The Greek debt crisis has been attributed by the mainstream European media to the bloated public sector of Greece and the ‘reckless’ spending of the people who allegedly worked less, had big holidays and consumed more than they could afford. The Greek public sector however, in terms of public sector workers to total work force is fairly low compared to other European countries (11.4%), being 14th in the list of 17 Eurozone countries. As for the 'laziness' claim, the truth is that the Greek people are at the top of Europe in terms of working hours. According to figures released last year by EUROFOUND, Greeks work on average 1,816 hours per year, way above the 1,659 hours of Germans and the European average of 1,708 hours per year. The debt boom started as soon as Greece joined the euro currency in 2001. Cheap credit flowed from the stronger economies within the Eurozone to the periphery (countries in the southern and eastern Europe), allowing rapid expansion of banks and direct investment in activity that benefited from the extremely favourable taxation policies and loopholes in legislation that facilitated tax evasion. The European Union has clauses that prevent lending to a country when its debt to GDP ratio is over 60%, but chose to overlook this commitment in the case of Greece. The European banks and states had no inhibitions in continuing loan provision to Greece, even though the debt soon exceeded 100% of the country’s GDP. Along with Greek capital holders and businesses, they are directly responsible for the debt crisis. Furthermore, a series of corruption scandals, and low taxation for big capital and enterprises played a crucial role in limiting public funds. The Greek public administration has been plagued by corruption and political interference - almost always in favor of the same entrepreneurial interests. A big percentage of the latest booming of public expenditure came from consistently high military spending. France and Germany have been arms trade partners with Greece and have sold military equipment worth billions of euros to Greece over the years. Lastly and most importantly, the bank bailout packages and guarantees were the final blow to public finances. In 2008 the Greek banks received €28 billion and last year another €30 billion, money covered by the Troika loans which were denied from vital functions of the state such as welfare, education and healthcare.
4) What are the austerity measures?
All efforts up to now to limit the deficit have been in vain, despite the draconian Structural Adjustment Programmes imposed on Greece as a condition of emergency loans that went by the names of 'Memorandum' and ‘Mid-term Stability Program’. These programmes have been revised at least four times, always with the addition of stricter measures. The current government, along with the supporters of the Troika intervention, have consistently faced the public with the dilemma ‘Memorandum or default’. This is a recurring theme in every twist and turn of the crisis and the ruling party has exhausted this rationale on the repeated attempts to limit debt with austerity and contracting consumption. They claim a possible default could decimate purchasing ability and may make the Greek state unable to pay pensions and wages. The IMF revealed that it aims to significantly lower the public reallocation expenditure to below 35%. It has called for lower wages, cutting public sector salaries by a fifth, slashing pensions by 20%, 30,000 redundancies in the public sector, privatization of state owned industries, a new severe tax on property and higher VAT among many others. Most of the welfare provisions in terms of pensions, healthcare, and education have been severely affected. A further source of income was supposed to come from the issuing of new licenses for professions such as pharmacists, lawyers and truck drivers, but was met with fierce resistance, especially from taxi drivers. As expected, these measures have not only failed to generate more revenue, but have also put the public treasury in constant threat of default and reliant on further loans and every public service in danger.
5) What are the alternatives?
The sustainability of a 50% cutback of the otherwise unpayable debt would still not constitute a permanent solution, as the austerity measures already in place ensure that the drag on the economy will be long and painful. High interest rates from the international market will make it very difficult or even impossible for the Greek economy to rebound and if the austerity measures persist, living conditions and purchasing power, which dropped significantly over the last 18 months, will drop even further. The real question is not when a re-scheduling of the debt will happen, but on whose terms and what that would mean for ordinary people. Since the beginning of the crisis, the Greek people have resisted the austerity measures that were imposed on them by the PASOK government. The resistance has spread to all parts of the society, with a total of 14 general strikes since the beginning of the Troika intervention, square occupation movements (the Aganaktismenoi or 'Occupy' movement) similar to Spain and Egypt, public buildings and university occupations, civil disobedience campaigns around the denial of paying the new taxes and broad initiatives for the cancellation of the country's debt. Along with the strong opposition by movements and the reactions from trade unions and students, a serious attempt has been initiated to establish a Debt Audit Commission.
Concerns have been raised about the legitimacy of the loan deals and the terms imposed for those loans.
The effort is based on the democratic and constitutionally enforced right for the people to know about and have a say in the finance of the country. The main goal through their declaration would be to indicate “the odiousness of the debt and the political responsibilities for its creation, as a means of forming appropriate proposals for tackling the debt crisis”. This audit would benefit from the cooperation of economists, professors, lawyers, activists and debt experts. Based on the findings the Commission would give evidence and support to initiatives for ‘opening the books’ of public finance, the expulsion of the Troika and questioning of the nature of the external debt. The Greek crisis is still unfolding and the coming months will show which side will win the argument on how the country will get out of the crisis.
