Grim Times in Athens

Greece: Death spiral ahead

How the latest 'solution' to the debt crisis locks Europe into a grim next chapter

By JAMES K. GALBRAITH

Politico,

17 July, 2015

The Greek Parliament has now voted to surrender control of the Greek state to platoons of bureaucrats from Brussels, Frankfurt and Berlin, who will now re-impose the full policy regime against which Greeks rebelled in January 2015 – and which they again rejected, by overwhelming majority, in the referendum of July 5.

The orders from Brussels will impose strict new rules on the Greek people in the supposed interest of paying down Greece's debt. In return, the Europeans and the IMF will put up enough new money so that they themselves can appear to be repaid on schedule–thus increasing Greece's debt–and the European Central Bank will continue to prop up the Greek banking system.

A hitch has already appeared in the plan: the International Monetary Fund, whose approval is required, has pointed out—correctly— that the Greek debt cannot be paid, and so the Fund cannot participate unless the debt is restructured. Now Germany, Greece’s main creditor, faces a new decision: either grant debt relief, or force Greece into formal default, which would cause the ECB to collapse Greece's banks and force the Greeks out of the Euro.

There are many ways to rewrite debt, and let's suppose the Germans find one they can live with. The question arises: What then?

An end to the immediate crisis is likely to have some good near-term effect. The Greek banks will “reopen,” likely on Monday, and the European Central Bank will raise the ceiling on the liquidity assistance on which they rely for survival. The ATMs will be filled, although limits on cash withdrawals and on electronic transfers out of the country will likely remain. There will be some talk of new public investment, funded by the European Union; perhaps some stalled road projects will restart.

With these measures, it is not impossible that the weeks ahead will see a small uptick of economic life, and certainly, any such will make big news. It's also possible that even without good news, Greece may limp along in stagnation, within the Euro.

But if you walk through the requirements of Greece's new program, there is another possibility. That possibility is an economic death spiral – contraction leading to banking failure, banking failure leading to contraction – first in Greece and, later on, elsewhere in Europe.

Here's what that would look like:

Value-added tax rates – your basic regressive sales tax – will jump by ten percentage points or more, to 23 percent, including for hotels and restaurants and including on the Greek islands. This will divert tourists to Turkey and elsewhere, damping Greece's largest industry. Also, it will drive small businesses even further to cash and tax evasion. This means other tax revenues will also fall.

Tax revenues will rise at first, but then they will fall short of targets, both because economic activity falls and evasion rises. As this happens, the new program requires that public spending be cut automatically. Since most public spending goes for pensions and wages, this means that pensions and wages will be cut. Since pensioners and civil servants live on these payments, they will cut their spending – and tax revenues will fall further.

In the labor market, extreme deregulation will proceed. Collective bargaining will be suppressed; wages will therefore fall. As a result, wage labor will go off-the-books, into cash, even more than it already has, and pension contributions will decline again. The resulting tax losses will feed back into pension cuts.

Privatization will work through a required new fund that will, supposedly, hold 50 billion euro in Greek assets to be sold off (notwithstanding the difficulty that, according to the Economy Minister, public assets on that scale do not exist). Anyhow the state electricity company will be sold, and electric rates will rise.

As all this happens, even more people will default on their mortgages. The judicial code will be rewritten to facilitate mass foreclosures, so far held in abeyance. The non-performing-loans of the banking system will then go from disastrous to catastrophic.

Now then, under these conditions, what do you think will happen to the banks?

It is possible that a surge of “confidence” will now bring cash deposits back to the banks, new inter-bank loans from North Europe, new lending to small businesses, new jobs and economic growth. Possible, but not likely.

Much more likely, with every increase of the ceiling on Emergency Liquidity Assistance (ELA), and every relaxation of capital controls, people in Greece will line up to pull cash from the banking system. They will do this because they have to, in order to live. They will do this because cash avoids taxes. They will do it because any fool can see that the banks are doomed. So deposits will go down, the ELA will go up, still more loans will go bad, and the banks will continue as zombies until – at some point – the European Central Bank gives up and closes them down, this time for good. Greek depositors will then lose what little remains.

Meanwhile, let's return to the legal status of the new economic program. It is true that the Greek parliament has approved it – as the Prime Minister said, with a “knife to the neck.” But it is a point of law that a contract signed under duress is not enforceable. This point will be heard soon, and clearly, in Greek politics if not in the courts.

It will resonate, also, through Greek society. The free consent of the governed is a right, which the Greek people have now been denied. They will not take it lightly; one can expect both passive and active resistance. Street conflict—not good for tourism—will become, once again, routine. As this happens, the drachma will become a symbol of national freedom.

Eventually, the Greek majority – the 62 percent who voted “No” on July 5 – will be heard from again. A government elected by that majority will not go back to negotiations. Instead, it will repeal the program, default on the debt, take the consequences and leave the euro.

So within a few months or years, what has just happened will be overturned and repudiated. And if the Greek banks have not failed yet, they will then. At that point, Greece will be poorer than it is, even now—but it will again be independent.

But wait. The death spiral dynamic isn't necessarily limited to Greece. It could start to happen in Spain, Portugal, Ireland, and perhaps Italy – beginning, as it did in Greece, with a fall-off in inter-bank loans from Northern Europe. Bankers, it turns out, are often the first to start a run on other banks.

What the Greek government tried to do, for five months, was to forestall this dynamic, and to bring a glimmer of economic coherence – and the potential for economic survival – to the Eurozone. It tried to get its “partners” to recognize that economic policies that had failed to produce predicted recovery for five years should be reconsidered and changed. For this heresy, Greece was crucified, to set an example. And an example it will become.

But the lesson the good citizens of the other crisis countries will draw may not be what their financial masters suppose. It may be, above all, get to cash, as quickly as possible. And get out of the Euro as soon as you can.

James Galbraith's most recent book is The End of Normal. He teaches at The University of Texas at Austin, and has been recently in Greece as a friend of the former Finance Minister, Yanis Varoufakis

DISPATCH

Athens, a City Scorned

The capital is in revolt. Has Prime Minister Tsipras dug his political grave?

Foreign Policy,

17 July, 2015

HENS — Marxist theorist Rosa Luxemburg once warned against pretending to be a revolutionary: You draw all the ire that’s due a revolutionary, yet you accomplish nothing. On Monday, July 13, Greek Prime Minister Alexis Tsipras agreed to a laundry list of austerity measures that he had opposed viscerally — and publicly — for months. Now, he’s being lashed with acrimony from every corner of the Greek political field.

From the right, Panos Kammenos, the defense minister and head of the Independent Greeks party, Tsipras’s coalition partner, can no longer uphold the semblance of a common front. In news conferences, Kammenos openly denounces the terms that Tsipras has agreed to implement. Further to the right, Ilias Kasidiaris, the spokesman of the neo-Nazi Golden Dawn party, shred to pieces a copy of the new bailout terms while delivering a speech in Parliament on Wednesday.

But the more damning critiques are coming from Tsipras’s left. Within Left Platform, the more hard-line Marxist, anti-austerity faction of Tsipras’s Syriza party, come the cries of prodosía (“betrayal”). On Friday, Tsipras replaced two ministers who voted against accepting the bailout. On the furthest fringes, mostly among the Communist Party and Greece’s anarchist segments, the accusations get rowdier: Tsipras is a Germanotsolias, a “Nazi collaborator.” The few who dare to support the prime minister today are the ones who paved the way for his electoral victory in January through their own ineffectual handling of the country’s economic crisis — members of the center-right New Democracy and center-left PASOK parties. Many of these men and women despised him just days ago. But then both parties have experienced what Tsipras must be feeling now.

The sense that Syriza has betrayed its own principles is tangible all over the streets of Athens. On Monday night, the day of Tsipras’s capitulation, I walked down Vasilissis Sofias Avenue toward Syntagma Square, where a protest against the new bailout terms had been arranged, mostly by unionized dockworkers whose collective bargaining rights will be largely eliminated under the privatization programs that Syriza promised not to continue, but now must implement in order for Greece to remain within the European Union. The first thing I saw were police: battalions of the Units for the Reinstatement of Order, or MAT, the widely despised thugs who have been the ground-level enforcers of austerity measures, stamping out working-class opposition to each new round of state-sector layoffs and wage cuts.

The idea behind MAT goes back to the military junta that ruled Greece from 1967 to 1974. The regime considered gatherings of Greeks in public spaces dangerous. Many Syriza members cut their political teeth during the student uprisings against the state brutality of that time. Tsipras himself rose to power in part by criticizing the repressive tactics of New Democracy and PASOK over the last six years. In March, Giannis Panousis, the minister of citizen protection, told me that the MAT would be demilitarized and altogether disbanded within months. Yet here they were as I entered Syntagma Square: a hundred or so officers sitting guard on the steps of Parliament, decked out like soldiers, wielding batons and shoulder-height fiberglass shields. For the last six months, the majority of the protests in Athens have been in support of government efforts to resist austerity measures. But now that protesters have turned against the government, Syriza has brought these units back out. “Didn’t expect this,” a crane operator named Dimitris from the Piraeus suburb of Perama told me. “You know, many Syriza politicians were actually with us, here, on the streets, fighting against the police, before they made it there.” He pointed to the Parliament building.

By Wednesday the situation had turned violent. I arrived in Syntagma Square at 9 p.m. to find the police deployed against a new wave of demonstrators who had gathered to protest the austerity measures narrowly passed through Parliament that night. Less than two weeks prior, Tsipras had stood on a stage at this very spot, declaring that democracy in Europe had been salvaged as he led tens of thousands of Greeks in cries of “No!” Now, police officers were dragging demonstrators from the crowd — some of them had turned violent, but some of them had not — and had started pummeling them behind the Parliament gates. A few of their victims were women. Tourists (Germans among them) looked on in horror. Syriza ministers were watching all this happen from the balconies of Parliament. Down at street level, it was obvious what pleasure the police took in their task. It had been six months since these men — about half of whom are thought to have voted for Golden Dawn — had been given free rein to smack down leftist teenagers. Now they got to do so on behalf of a leftist government.

Down Panepistimiou Street marched a column of several thousand union members associated with the All Workers Militant Front. Those on the edge of the mass were keeping the march in order, holding flagpoles horizontally like a fence. From loudspeakers came chants. “Down with Europe’s plutocracy!” I spotted someone I recognized, a mechanic from Pakistan called Farooq, in the crowd. “We are the workers!” On the right-hand side of the street, teenagers clad in black — mostly the anarchists and the unemployed — were fending off the advancing police, hurling bottles and rocks and calling them fascist pigs as the youth dared them to come closer. The police fired canisters of tear gas at the anarchists, who in response set a TV satellite van on fire. Dumpsters were overturned and set ablaze in order to break up the police formations. The headlights of passing police trucks were bashed out with sticks.

Greeks are exhausted and confused by their ongoing purgatory. At this point they are paying the price for Tsipras’s miscalculations but are now shorn of the prospect that relief may be within sight. Capital controls implemented on June 29 — 60 euro daily withdrawal limits for Greeks, 300 for foreigners — will be enforced for at least the next month, though probably longer. It wasn’t clear at the time what the July 5 referendum was about, but it’s clear now that its outcome was meaningless: Greeks voted overwhelmingly “no” to austerity measures that were agreed upon anyway. This time the suffering will be even worse. Forecasts project a 4 percent recession in the Greek economy by the end of the year. Greeks who had expected to retire this year will have to wait two more. Public services reopened by Syriza — the Greek public broadcasting service, for instance — will likely be shut back down; the jobs that were restored along with their reopenings will also go.

A schism now runs through Syriza. On Wednesday about half the party, primarily members of the Left Platform, broke into open revolt against Tsipras, refusing to endorse the austerity measures on which he had signed off. This likely marks the end of Syriza as a political entity. Greeks will probably head to the polls again in September for fresh elections. Their options, never many, will be even fewer.