Greek default and exit has always been the most likely outcome of the eurozone crisis. The truth is that economic and monetary union has failed, not least because it has created an unsustainable gap between core and periphery. For peripheral countries, EMU membership is likely to be a source of stagnation and income inequality. For Greece it has already been a failure of historic proportions.
The problem faced by the country in 2009-10 had much in common with the rest of the periphery: vast public and private indebtedness, low competitiveness, huge current account deficits, and rapidly ballooning public deficits and debts. The response of the EU was obtuse. A so-called bailout was advanced to Greece, but at rates 3% and 4% above those paid by Germany. Severe austerity was imposed, cutting national income by 4.5% in 2010 and probably 4% this year.
Even a first year undergraduate could have worked out that the last thing a bankrupt needs is further punitive loans and a cut in income; inevitably the stabilisation plan has been a disaster, missing just about all its original targets. The numbers are breathtaking. Under current policies, the EU/IMF/ECB (European Central Bank) «troika» expects sovereign debt to rise to 200% of GDP in 2015, up from roughly 150% at present. Servicing the debt will cost 12% of GDP – vastly more than expenditure on health and education – while the government deficit will be 15% of GDP. The country will be unquestionably bankrupt. Fully aware of this, financial markets are refusing to advance a penny in new private loans. And since the troika had planned for Greece to return to the markets in 2011 on the back of the expected success of the stabilisation plan, the crisis has reached fever pitch.
The response of the troika reveals systemic failure at the heart of the eurozone. Greece will receive another large loan but must impose further austerity, including wage and pension cuts, perhaps 150,000 lost jobs in the civil service, more taxes, and sweeping privatisation. And what is likely to happen if the country accepts this? By the calculations of the troika, in 2015 sovereign debt will be 160% of GDP, servicing the debt will cost 10% of GDP, and the government deficit will be 8% of GDP. In short, Greece will still be bankrupt.
What, then, is the point of the fresh bailout ? The answer is rescuing international bondholders and buying time for banks. Jean-Claude Trichet, the ECB president – an unelected bureaucrat – has imposed his will on Angela Merkel, Europe’s most powerful politician. In 2015 Greece will be bankrupt but its debt will be held overwhelmingly by public lenders: the EU, ECB and IMF. When default comes, the banks will be out of it and Europe’s taxpayers will bear the burden. Meanwhile, Greece will have gone through the austerity mangle, putting up with official unemployment of about 15%. And when the EU writes Greek debt off, as it must, it will impose extortionate demands, perhaps including open pressure to exit the eurozone.
Unfortunately for the troika, this time the Greek people have worked out the nastiness of what is proposed. They are also profoundly angry at their politicians, and at being slandered. After all, they work longer hours than most people in the EU and, as wage earners, can’t avoid tax. The Rubicon appears to have been crossed in recent weeks as the country is openly weighing the option of default and exit.
Should that take place, it will be a major blow to the economy. But Greeks are prepared to put up with straitened circumstances if they see a path to recovery, something EU policy is denying them. A political force that promised to deliver default and exit in a democratic and sovereign manner while putting people before banks would sweep all before it. As for the EU, it would have to deal with the aftermath for banks and EMU, hopefully finding someone other than Trichet to guide it.
Costas Lapavitsas, a professor of economics at the School of Oriental and African Studies, University of London.