Bailout, Default, or Plan C
The Greek debt crisis is once again upon us, and the FT is filled with articles about ramifications for the Eurozone, and recommendations for what to do now. (See here, here, here, and here.) Understandably so, since the Eurozone is now the largest creditor of Greece, perhaps soon to be even larger if, as I would expect, the Eurozone takes the IMF’s ill-considered exposure onto its own balance sheet. (California has no IMF package, and neither should Greece.)
Jurgen Stark, of the ECB, tells us that restructuring, whether soft (reprofiling) or hard (default), would be a disaster for the Greek banking system, but the Greek banking system has much less total exposure than the Eurozone, including the ECB itself. Stark is talking his own book, and there is nothing wrong with that. To the contrary, rational discussion about the road ahead requires facing up to the magnitude of the European exposure, today and going forward.
Last week I was in Athens, and found myself by accident on the edge of a demonstration against the government’s austerity measures. It was my first ever taste of tear gas, but for the Greeks around me it was apparently a more or less everyday experience. The picture above shows the Parliament, and the riot police in formation waiting for the crowd.
Yesterday I was in Istanbul for the annual conference of the European Society for the History of Economic Thought, and heard a paper by George Stathakis titled “The fiscal crisis of the Greek economy: a Kaleckian framework” that put the whole problem in a new perspective for me. The reference to Kalecki is a signal that Stathakis thinks distributional issues are at the core of the macroeconomic problem.
It turns out that the size of the Greek debt, relative to GDP, is not a new thing at all; it dates back to the 1980s when Greece, catching up to its European neighbors, expanded its welfare state. Ever since, Greece has been subject to one stabilization plan after another, but never with any more than temporary success. Given that history it would seem wise, before putting a lot of eggs into yet another stabilization plan basket, to ask why previous plans failed, and to consider alternatives.
The problem is also apparently not the size of the Greek welfare state—which is below the Eurozone average—although efficiency of service delivery (and corruption) is a definite problem; Greeks are not getting good value for money. Rather, the heart of the problem is in the antiquated revenue system that supports that state, which results in a budget shortfall consistently about 10% of GDP. Stathakis claims—perhaps overstating the case somewhat for effect?—that the top 20% of the income distribution in Greece pay no taxes at all. No wonder there is a fiscal crisis.
To make the problem worse, export earnings also seem to face their own structural cap that is consistently exceeded by import spending, which means that the debt that finances the government shortfall is increasingly held abroad. The debt is issued under Greek law, but now it is payable in Euros which Greece is powerless to print. In this sense, ironically, the fiscal crisis is a consequence of Greece’s success, after a long preparation, in joining the European Union, and hence giving up its own currency.
The point is that, if this analysis of the source of the problem is correct, then standard IMF austerity policy is unlikely to do much to help. If the problem is not the level of wages, or the size of the welfare state, then pushing wages down and shrinking the welfare state is not going to do much.
Angela Merkel likes to say that no real economic union is possible if one party to the union (Greece) works shorter hours and takes longer holidays than another (Germany). What she should say is that no real economic union is possible if the governing class (top 20%) of one party to the union consistently evades its fair share of the cost of that party’s own state expenditure, expecting the union either to pay the bill itself, or to force the bottom 80% to pay it.
From this perspective, the Europeanization of the Greek debt appears as potentially a promising development for the future. The Greek fiscal trouble is ultimately a political economic problem, and it requires a political economic solution. The road forward is for Eurozone holders of Greek debt to make common cause with the Greek taxpayers who are on the hook for that debt.