Public debt is at the heart of the eurozone crisis. Greek public debt, already very high for years, has grown extraordinarily since 2009. Irish public debt has escalated once the debts of private banks were added to it. Portugal and Spain threaten to go the same way. Similar trends can be seen in other European countries, the UK not excluded.
Common patterns usually have common causes. The global crisis of 2007-9 resulted in huge costs, partly due to rescuing the financial system, partly due to falling output and rising unemployment. In the eurozone things were made worse because the common currency had weakened peripheral countries, giving rise to large current account deficits. Peripheral weakness was masked for a while by credit-fuelled booms in real estate and consumption, but this only made the blow of the crisis more severe.
Rising public debt has eventually led to adoption of austerity policies by several European governments. Public expenditure, including on health and education, has been cut; wages and pensions have been compressed; indirect taxes have been raised. The costs of the crisis have been transferred onto the shoulders of people who had nothing to do with the financial orgy of 2001-7. In the periphery of the eurozone the transfer of costs has taken catastrophic dimensions, with collapsing incomes and mass unemployment.
These austerity policies pose major problems of democratic accountability, quite apart from their social and economic implications. Working people have been called upon to shoulder the burden of public debt, but have they been properly informed about its composition, its terms, and its sources? The answer is a resounding no in several European countries. Publicly available information is scant, partial and hard to obtain. Important aspects of issuing debt, such as the operations of banks in the bond markets, remain shrouded in mystery. Even less is known about the role of politicians and their connections with financial institutions, property developers and other captains of private enterprise. Parliamentary elections are completely insufficient to shed light on these questions.
In Greece and Ireland the issue is burning. Can we be certain that the bulk of Greek public debt is legal, given especially that it has been contracted in direct contravention of EU treaties which state that public debt must not exceed 60% of GDP? The creditors – mostly core European banks – were fully aware of flouting this legal requirement when they lent to the Greek state. Is Irish public debt legitimate, given than much of it is speculative bank lending with a public tag placed on it? Is debt in both countries ethically and morally sustainable if servicing it implies the destruction of normal social life?
To find answers, countries should form audit commissions that will be independent of political parties but also of parliament and other mechanisms of the state. They should comprise public auditors, economists, lawyers and other specialists, but also representatives of civil society and organised labour. They must have powers to demand public documents, call upon civil servants and others to give evidence, and even access bank accounts. On this basis they should examine public debt to determine whether it is illegal, illegitimate, odious, or simply unsustainable. Society will then have more secure grounds to decide how to tackle public debt. Not least, audit commissions could act as a first step in exercising democratic control over future public debt, instead of accepting the arbitrary rules that Germany now wishes to impose on the constitutions of eurozone members.
There is plenty of experience of forming audit commissions in developing countries. It is time to transfer this know-how to Europe, adapting it to the conditions of richer and more complex societies. For once, Greece is taking the lead. A campaign to form an audit commission was launched on 3 March with support by 200 prominent signatories from across the world and thousands of others in Greece. The aim is to create a broad movement that will demand independent knowledge and control over public debt. Given the parlous state of the country, the omens are favourable.
If the Greek people succeed in this endeavour, there is no reason why the Irish people, and still others across Europe, could not follow in their footsteps. We shall then see for ourselves how irresistible the international bond markets truly are.
By Costas Lapavitsas, a reader in economics and associate dean in research at SOAS.