by Matteo Caravani
While Professor Ian Scoones rightly pointed out in his article that there are many lessons that Europe could learn from African countries, the argument of this article is that we should learn something from the Greek financial crisis as well. This crisis has to be an opportunity to move the process of European political and economic integration – that came to halt in 2006 with France’s referendum on the European constitution – forward. We have to decide what we want to do with this Union and this decision can no longer be delayed: we either take a step forward or a step back! If the current state of affairs stays as it is, sooner or later other European countries, especially from the Mediterranean, could suffer a similar fate to Greece’s.
Since May 2010 when the Troika (EC, ECB and IMF) took over the Greek political economy, making the debt and fiscal reforms sustainable for the resources of the country should have been the most sensible goal not only for Greece but also for the collective interest of the European Union. Instead, over the past five years the recipe for Greece has always been spending cuts and tax rises, rather than finding a long term solution. This is made clear by looking at the fact that – despite Greece following the Troika’s recipes for the past five years and cutting its Government spending more than any other country in Europe – GDP has reduced and unemployment rate has increased. In sum, five years of neoliberal ideology caused a fall in GDP of 20.7%, between 2010 and 2014, with an estimated loss of 62 billion euros, and an increase of the unemployment rate from 12.5% in 2010 to 27.3% in 2014 (WB, 2015).
These results have not been caused by austerity measures only – a term that everyone hates nowadays – but are also the outcome of structural adjustments inspired by neoliberal ideology, as was found in many African countries during the 80s and 90s. In 2012, for example, the Troika imposed on Greece as a condition to receive loans, economic structural reforms, such as the reduction by 22% of the minimum wages for those aged 25 years and 32% for youth under the age of 25, a policy aimed at making Greece’s products more competitive. As should have been foreseeable by then, the result of this policy has been a reduction in aggregate demand, significant disemployment effects (Yannelis, 2014) and an overall worse economic recession.
Who is going to pay for the “horrors” of the economic policies imposed by Troika to Greece from 2010 to 2015 today? That is, besides the Greeks citizens? Theoretically, the Troika should have taken decisions in the interest of the Eurozone, by making the debt and fiscal reforms more sustainable for Greece. The actual result, willing or unwilling, has been that European private banks – especially German and French banks – have much less credit exposure over Greece compared to the situation before the first bail out of 2010. In other words, the Greeks junk bonds were passed from the private banks to the central banks and other institutions in a sort of socialization of losses as also Jeffrey Sachs recently pointed out: “the focus was on bailing out German and French banks.” Overall, the private banking system was saved while Greece in 2015 is in a worse economic condition than five years ago.
The point here is not to try and establish what would have or could have happened if the loan conditions and reforms set by the Troika had been different. The point is that since the first bail out in 2010, Greece lost its economic sovereignty, becoming a sort of “protectorate” remotely micromanaged from Brussels and Washington. In fact, the height of Greece’s economic decline (2010-2015) happened at a time when the country was, in fact, not fully in control of its political economy: this pushes the question of accountability beyond the historical demerits and negligence of Greece because of the direct political and economic involvement of other actors (i.e. Troika etc…) who cannot eschew the question of responsibility.
The “responsibility” argument that has been voiced repeatedly in the course of the Greek crisis as if to remind the world that the economic recession in the country has been completely self-inflicted because of poor political leadership. The truth is that the “responsibility” for the present Greek disaster is shared among the Eurozone countries represented by the Troika and the damaging economic policies it imposed on Greece over the past five years. In reflection of this state of affairs, the Greek debt relief should be reduced to what it was the day before the first bail out in 2010 – that is, 307 billion euros (IMF, 2010) against the current 314 billion euros (EUROSTAT, 2015) – with the addition of the GDP loss of 56 billion euros (WB, 2015). In other words, a total of 63 billion euros – that is, the difference between 2015 and 2010 debt and GDP – should be used as proxy for the economic damages that resulted from the Troika policies for Greece. In fact, 63 billion euros should be returned to Greece! All the Eurozone countries should take their own responsibilities in the name of the socialization of losses – a dictate that has been adopted by the Troika in previous occasions, as for the saving of the private bank system with public money. Creditors have been saved from bankruptcy, let’s save debtors too!
This is more than an economic proposal: it is a call for accountability measures that fairly redistribute responsibilities for the Greek crisis across the different stakeholders. This proposal would eventually just reduce the debt of 20% without solving the more structural problems of the Europe and Greek economy in particular, but it would be a fresh start for the Eurozone that will improve the relationship among the member states; a base for a more solid political union and a recognition that there is need for change in the institutional architecture of the Eurozone.
Once this is done we can sit and discuss whether the current mechanisms are able to help countries that are facing economic recessions. In 2008, for instance, the United States lifted its economy after a terrible recession through policies of deficit spending, of typically neo-Keynesian inspiration. On the contrary, in the Eurozone the current economic ideas and roles – basically a cocktail of Friedman and Maastricht parameters – do not allow countries to realize neo-Keynesian economic policies. As Alan Blinder wrote on The Wall Street Journal last week, countries have three fundamental weapons to fight economic recessions: stimulation of the fiscal system, stimulation of the monetary system and depreciation of their currencies. Being in the Eurozone means losing the last two instruments, while brutally limiting the first one. As a result, the Greek problem may never be solved given the actual roles of the Eurozone. Is this the overarching problem? Are we transforming the European dream into a nightmare due to the monetary roles made by a group of “Chicago boys” nostalgics? If the current system does not allow countries experiencing financial crisis to overcome their situation, why are we judging and inflicting so much pain on Greece?
The Greek crisis proved once again the extent to which Europe is still divided, with many countries protecting their own interests, and without a collective vision and overarching goal for the future. Currently, the European Union is a political hybrid but if we want to overcome the Greek crisis – which could just be the first of many – we need to move forwards the process of European political and economic integration, ultimately towards a federal Europe with fiscal transfers between country members, as in the United States.
Any crisis should be an opportunity to change the institutions and its roles, especially when these no longer serve the best interests of European citizens. As we all know, economics is not a science in the same way that geometry and mathematics are. Once again we need to repeat this to a particular group of economists more notable for mathematical skills than for local knowledge who believe in deregulation, privatization and balanced budgets as the standard solution to economic recessions. Over the past five years, the implementation of packages of neoliberal economic policies in Greece caused more harm than good. It’s time to change ideas and roles. Let’s all learn from Greece!
Matteo Caravani is a PhD researcher at IDS, within the Resource Politics cluster. He is a development economist graduated at the faculty of economics of Rome la Sapienza with a thesis on “Sub-Saharan African Oil Exporting Countries: Uganda’s Case Study.” Then he worked for the World Food Programme in Uganda as Programme Officer in charge of all safety nets and resilience programmes in Karamoja. This experience inspired his PhD research question: “What are causes and drivers of socioeconomic differentiation in the village of Lojom (in Karamoja north-eastern region of Uganda)?”. Overall, his research interests include livelihoods, food security, agrarian change, migration, resilience and social protection mechanisms in Sub-Saharan Africa.