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european central bank
IMF Says Corporate Profiteering Caused Nearly Half of Europe's Recent Inflation Surge
"Companies increased prices by more than spiking costs of imported energy," said economists with the International Monetary Fund.
Jun 27, 2023
Economists with the International Monetary Fund on Monday echoed what progressive experts and campaigners around the world have been arguing for more than a year: Corporate profiteering has been a key driver of the recent inflation surge.
In a blog post on Monday, the IMF's Niels-Jakob Hansen, Frederik Toscani, and Jing Zhou wrote that "rising corporate profits account for almost half the increase in Europe's inflation over the past two years as companies increased prices by more than spiking costs of imported energy."
If inflation is to return to the European Central Bank's 2% target, the trio argued that "companies may have to accept a smaller profit share" as workers demand "pay rises to recoup lost purchasing power."
The economists referenced a working paper they released last week that shows corporate profits are responsible for just under 45% of the inflation spike during the coronavirus pandemic.
As the paper explains, companies have hiked prices beyond what was necessary to cover the rising prices of energy and other materials, passing greater costs onto consumers and fueling a cost-of-living crisis across Europe while padding their bottom lines.
The London-based oil giant Shell, for example, saw its profits more than double to a record $40 billion last year.
"Europe's businesses have so far been shielded more than workers from the adverse cost shock," the economists wrote in their blog post. "Profits (adjusted for inflation) were about 1% above their pre-pandemic level in the first quarter of this year. Meanwhile, compensation of employees (also adjusted) was about 2% below trend."
The IMF experts' findings were limited to Europe, but economists have similarly found that corporate profiteering is fueling price increases in the United States.
In March, the Economic Policy Institute's Josh Bivens wrote that "in normal times, corporate profits contribute about 13% to prices."
"Since the second quarter of 2020, they have instead contributed more than a third of price growth, or more than twice as much as they normally do," Bivens estimated.
Data released last month by the U.S. Bureau of Economic Analysis showed that corporate profits rose to a record high in the first quarter of 2023 even as the Federal Reserve worked to slow the broader economy with aggressive interest rate hikes.
After spending more than a year openly targeting the labor market and workers' wages, Fed Chair Jerome Powell has acknowledged in recent months that lower corporate profits could help curb inflation.
On earnings calls, top executives of major corporations have openly credited continued revenue and profit growth to their ability to raise prices even as business costs fall.
"Pricing has continued to be the big driver behind our top-line growth over the last three quarters," Kimberly-Clark's chief financial officer said during the company's April earnings call.
Liz Zelnick, director of economic security and corporate power at Accountable.US, said earlier this month that "it's clear the corporate profiteering epidemic will persist no matter how many times the Fed doubles down."
"Corporate greed is a stubborn thing and requires serious action from Congress," she added. "The Fed has not seen an adequate return on its investment in a policy that has already created fissures in the economy that could lead to recession. It's just not worth it."
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The Rise and Fall of Greece’s Radical-in-Name-Only Syriza Party
Lack of experience in governance, ideological confusion, severe structural constraints, crude political opportunism, and broken promises guaranteed that Syriza’s downfall was just a matter of time.
May 25, 2023
On January 25, 2015, Greece’s left-wing party Syriza (Coalition of the Radical Left), which subscribed to no particular ideology but ran an election campaign that vowed to end the sadistic austerity measures that had been imposed on Greece by its international creditors, shred the bailout agreements into pieces, write off a big chuck of the debt, and create jobs for hundreds of thousands of unemployed, won the legislative elections by taking 36% of the popular vote. The result of the election sent shock waves through Europe’s political establishment and marked the return of hope for Greece and left-wing parties and movements around the world.
It was indeed a historic victory for the Left, especially considering the fact that, ten years earlier, Syriza was struggling to gain just a few seats in the Greek parliament. The Communist Party of Greece was far more popular than the Coalition of the Radical Left, whose ranks included an array of leftists ranging from Trotskyists, Maoists, and neo-Marxists to greens and feminists. Indeed, while the Communist party had solid links with working-class people and exerted decisive influence on trade union activism, Syriza’s “impact on civil society was confined to the ideological attraction that it had for a small segment of the academia."
On May 21, 2023, elections were held in Greece and the conservative New Democracy party of Prime Minister Kyriakos Mitsotakis scored a landslide victory, trouncing Syriza by 20 percentage points. However, the new electoral system of proportional representation that had been introduced under the former prime minister and Syriza leader Alexis Tsipras prevents New Democracy’s 40% vote to win an outright majority of the 300 seats in parliament. Mitsotakis had revealed all along that he is not interested in sharing power, so a second election is going to take place in late June where the winning party needs to achieve just 37% of the popular vote.
It was abundantly clear to any unbiased observer that Syriza’s inner circle consisted of people who were dedicated to the pursuit and maintenance of power rather than bringing about radical change.
The scale of Syriza’s defeat in the parliamentary elections of May 21 (lost all but one of the 59 electoral regions in Greece) may signify the end of the road for the party of Alexis Tsipras. The party’s demise has in fact been underway from the very first weeks that Tsipras took office as Greece’s prime minister. Lack of experience in governance, ideological confusion, severe structural constraints, but also crude political opportunism and broken promises pretty much guaranteed that Syriza’s downfall was just a matter of time.
First, the radical-in-name-only Syriza party formed a government with the right-wing and xenophobic party Independent Greeks. There were deep disparities of all sorts between the two parties, but obviously this did not matter to Tsipras since he saw forging an alliance with right-wingers as a necessary tactical move to secure power. And power was all that ever mattered to Syriza’s leader and his inner circle. During the 2023 election campaign, Tsipras would leave many leftist voters flabbergasted by courting voters from the neo-Nazi party Golden Dawn.
Second, Tsipras signed an agreement to extend the austerity measures imposed on Greece by the euro masters, only a few weeks after coming to power.
Third, Syriza’s leader gambled on Greece’s future with a sham referendum in order to save his government from collapse and then went on to betray an entire nation that voted overwhelmingly against the continuation of austerity by signing a new bailout agreement that continued Greece’s status as Germany’s “de facto colony.”
Tsipras called the new bailout agreement “a necessary choice,” though he had engaged in ferocious attacks against his predecessors for having signed similar bailout agreements with the international creditors.
More than 40 Syriza MP’s spoke against the new measures, and half of Syriza’s central committee sided against the new agreement. But none of this mattered. Syriza had very weak democratic structures, no real links with the Greek working-class, and Tsipras had total authority over party decisions as most policy issues were decided in unofficial meetings with people close to the “great leader.” Moreover, Syriza as a party had lost its autonomy once it gained power and “was subsumed into the state.”
Indeed, it was abundantly clear to any unbiased observer that Syriza’s inner circle consisted of people who were dedicated to the pursuit and maintenance of power rather than bringing about radical change. Subsequently, following his government’s capitulation to the euro masters, Tsipras took steps to rebrand the party as a “progressive” political force and begun to tap into the legacy of the Pasok party, one of Greece’s center-left political parties, and to emulate more and more the political persona and political tactics of its charismatic founder and former Prime Minister Andreas Papandreou, who, incidentally, also appeared on the Greek political scene as a radical who made exorbitant promises to the people, such as socializing the economy, modernizing the countryside, terminating membership in NATO, and shutting down U.S. military bases in Greece.
Since the end of the Second World War, sadly enough, the Greek left has been betrayed by its own leaders on multiple occasions. The end result of Syriza’s abandonment of radicalism was defection on the part of hundreds of thousands of mostly working-class voters, though its metamorphosis into a mainstream political party attracted many center-left voters to its ranks.
In the 2019 legislative elections, Syriza still managed to gather 31.5% of the popular vote, losing just less than four points since its last victory in 2015, but the conservative New Democracy party not only won and secured a comfortable majority of 158 out of 300 seats, but had a remarkable 11-point increase from 2015.
Moreover, unlike Tsipras’ “leftist” government, Mitsotakis' conservative government kept many of its campaign promises and handled some foreign policy crises rather effectively. For example, Mitsotakis kept his promise to cut taxes, including a 22% cut to an unpopular property tax introduced during the first bailout agreement, suspended the value added tax on new construction, and reduced the insurance costs of employees and businesses.
Big capital and the middles classes have been the main beneficiaries of Mitsotakis’ efforts to rejuvenate the Greek economy. Because of the pandemic, Greece’s gross domestic product (GDP) contracted by 9% in 2020, but grew by 8.43% in 2021 and by 5.91% in 2022. Tourism contributed greatly to the strong rebound in GDP, and the economic prosperity of Greece remains strongly tied to the development of tourism.
However, Greece’s current accounts deficit increased substantially in 2022, mainly due to the worsening of the balance of goods. And the government debt-to-GDP ratio stood at 171.3% at the end of 2022, which is really at unsustainable levels, though the mainstream press in Greece would not devote space to presenting gloomy economic data ahead of the elections.
But it’s doubtful that doing so would have made any difference. The truth of the matter is that there is an impression among many Greek voters that the Mitsotakis’ government has stabilized the economy, protects the national interest more than adequately, and that it would be suicidal to have Syriza back in power after all its broken promises and flimsy statements made about the economy by key party members during an election campaign, which included a proposal for “local complementary currencies” by the party’s former minister of finance and which came only a few days after Yanis Varoufakis (rightly or wrongly, one of the most unpopular political figures in all of Greece) had called for the adoption of a parallel currency “Dimitra.” Syriza’s shaky position on key issues of national security was also a major drawback for many voters.
Indeed, it seems that what lies at the heart of the 2023 Greek legislative election results is that many voters were distrustful of Tsipras and his politics. This is most likely why so many voters appeared unfazed by revelations of a major surveillance scandal that engulfed the conservative prime minister himself. Mitsotakis’ New Democracy government is made up of right-wing conservatives and even includes in its ranks a couple of high-ranking officials with a history of involvement in far-right politics, but it seems that voters were more concerned with Syriza’s own deficiencies rather than those of the ruling conservative party.
Voters also delivered “a crushing defeat” to Yanis Varoufakis’ MeRA25 party as it failed to cross the 3% threshold to re-enter parliament.
Among left-wing parties, only the Greek Communist party performed better, gathering 7.23% of the popular vote over 5.3% in 2019.
In sum, the future of the left in Greece looks anything but promising at present. With the revival of Pasok, which had been in steep decline electorally since 2012 but managed to get 11.46% of the popular vote in the 2023 legislative elections, Syriza’s long demise may be complete a few years from now. And it will be very difficult for the current Communist party to climb into double digits even if Syriza returns to the dark days of securing low-to-mid single digit votes.
But the Greek left has suffered many crippling blows in the past and always finds a way to resurrect itself, to rise like a phoenix from the ashes. Because as long as exploitation, injustice, and extreme inequality remain central aspects of human society, there will always be a need to create a radical vision for the future.
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This Is Not a Repeat of the 2008 Financial Crisis, But It Is the Same Capitalist Rot
Since 2008, governments and central banks have been trying to prop up the banks through a combination of socialism for the banks, and austerity for everyone else. The result is what we see today.
Mar 17, 2023
Every systemic banking crisis has a trigger that sets it off. In the case of SVB, the reason for its bankruptcy is twofold.
Responding to worried questions raised by many about the ongoing banking crisis that started in the US with the bankruptcy of the Silicon Valley Bank (SVB), and is now affecting Japan and other countries, I can offer the following brief analysis.
The trigger
Every systemic banking crisis has a trigger that sets it off. In the case of SVB, the reason for its bankruptcy is twofold.
- The fall in prices in the secondary market for bonds – basically, US government bonds (treasuries) – which was caused by the Fed rate hike which, in turn, was “imposed” on all central banks by inflation.
- The plummeting in the share prices of Big Tech and of the entire digital ecosystem of small tech start-ups around Big Tech – a decline caused by the Fed’s termination (due to inflation) of money printing.
In more detail, SVB took two hits at the same time.
- The first hit its funds, which were mainly invested in US treasuries. This happened as the rise in interest rates reduced the resale price of these bonds (Why buy “second hand” an older bond that yields 0.5% when you can buy a “new” one that yields 3%?). In itself, this development was not sufficient to bankrupt SVB. As long as SVB was not obliged to sell at a reduced price the older bonds it held, there was no problem. However, because of the second hit, SVB was forced to sell at a large discount. And that’s where the problem started.
- When inflation forced the Fed to stop printing new money (i.e. no more quantitative easing), the flow of funds that were keeping the shares of Big Tech companies in the stratosphere also stopped. Thus, Big Tech shares deflated. As these companies (Google, Amazon, Meta, Twitter, Netflix, Airbnb, Uber, etc.) based their funding on loans taken out by putting up their overvalued stock prices as collateral (e.g., that’s how Elon Musk bought Twitter), Big Tech suddenly ran out of cash. That’s why they started pulling their deposits from banks like SVB.
In short, at the same time as SVB’s capital base was being reduced, depositors were asking for their deposits back. As soon as the news got out that SVB was late in returning depositors’ funds, a classic bank run began.
The cause
The underlying reason why the failure of a medium-sized bank in California created so much angst worldwide is that international capitalism has never been able to get back on its feet after 2008.
In more detail: Central banks (the FED, the ECB, etc.) have one basic tool – the interest rate. When they want to put a brake on economic activity to keep inflation in check, they raise the interest rate, and vice-versa. But, in addition to price stability, central banks have two other goals: the stability of the banking system, and the balancing of liquidity with investment. The interest rate chosen by the central bank is one. That same number (e.g. 3%) must achieve three objectives simultaneously: price stability, banking system stability, and balancing between liquidity and investment.
What could be done as an alternative? The exact opposite: austerity for the banks, with nationalisation of those who cannot survive.
And herein lies the reason why I argue that, after 2008, capitalism cannot recover: There is no longer one interest rate that can achieve all three of these objectives simultaneously. This is the tragedy of central bankers: If they want to tame inflation (at a high enough interest rate), they trigger a banking crisis and, as a result, they are forced to bail out the oligarchs who, despite being bailed out, drive investments below liquidity. If, on the other hand, they impose a lower interest rate to avoid triggering a banking crisis, then inflation gets out of control – with the result that businesses expect interest rates to rise, which discourages them from investing. And so on and so forth.
Back to 2008, then?
No, for two reasons. First, the problem for US banks today is not that their assets are junk (e.g. structured derivatives based on red loans) as they were in 2008, but that they own government bonds which they are simply forced to sell at a discount. Second, the Fed bailout announced yesterday is different from the one in 2008 – today it is the banks and depositors who are being bailed out, but not the bank owners-shareholders. These two reasons explain why bank stocks are falling but there is no total collapse of stock markets.
The fact that there is no total collapse of the stock markets does not, of course, mean that the crisis of capitalism – which has been developing continuously since 2008 – is not deepening. It simply does not have the characteristics of an instantaneous, heavy-handed fall.
What does this development mean for Europe?
In 2008, Berlin and Paris were rejoicing that the banking crash was American and did not concern them – or so they thought. Until they realised that Franco-German banks were loaded with the toxic US derivatives that bankrupted Lehman.
Today, Franco-German banks don’t seem to have the same problem – rather, they are being spared due to the antiquated structure of the European economy. What do I mean? Franco-German banks have not lent large amounts to European Big Tech for the simple reason that European Big Tech doesn’t exist – they still lend to car manufacturers and extraction companies. So, I don’t see a European SVB on the horizon.
That doesn’t mean, of course, that European banks are safe. Their own funds are also invested in bonds whose prices have fallen. A large deposit flight will create the same problems here as we are seeing in the US. Such a flight could come from parts of the financial system that one cannot imagine – for example, from the insurance sector (as in Britain last autumn) or from a collapse of the weak Credit Suisse, which has long been suffering.
What should have been done?
Since 2008, governments and central banks have been trying to prop up the banks through a combination of socialism for the banks, and austerity for everyone else. The result is what we see today: The metastasis of the crisis from one “organ” of capitalism to another, with the magnitude of the crisis increasing with each such metastasis.
What could be done as an alternative? The exact opposite: austerity for the banks, with nationalisation of those who cannot survive. And socialism for workers – a basic income for all, a return to collective bargaining and, further out, new forms of participatory ownership of high- and low-tech companies. In other words, nothing short of a political revolution.
To those who fear the idea of a political revolution, my message is simple: Prepare to pay the price of the escalating crisis of a capitalism determined to take us all to its grave.
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Losing Global Capitalism's Confidence Game
As the song goes, 'Something's got to give.' What will it be?
Mar 17, 2023
I hadn't intended to spend so much time this week on the banking crisis. I'm old enough to remember a time when banking was boring. But since the 1980s, banking has become hugely profitable for bankers and wildly dangerous for the rest of the economy. This week shows why.
At this moment, the Federal Reserve Bank is sitting on the horns of a dilemma.
On one horn are legitimate fears that smaller banks won't have enough capital to meet their depositors' needs if the Fed continues to raise interest rates when it meets next week.
Raising rates will slow the economy and possibly imperil banks—especially those that used depositors' money to purchase long-term bonds when interest rates were lower, as did Silicon Valley Bank.
In other words, raising interest rates next week could cause an even bigger run on the banks.
Besides, inflation is receding, albeit slowly. So why take the risk?
But on the other horn are the Fed's legitimate fears about inflation becoming entrenched in the economy, requiring more interest rate hikes.
But the two objectives—avoiding a bank run and raising rates—are in conflict. As the song goes, Something's got to give. What will it be?
This week's goal was to stabilize the banks enough so the Fed can raise interest rates next week without prompting more bank runs.
This required the Fed to bail out uninsured depositors at three banks and signal it will bail out others—in effect, expanding federal deposit insurance to cover every depositor at every bank.
On top of this, 11 of America's biggest banks yesterday agreed to contribute a total of $30 billion to prop up First Republic Bank, another smaller bank caught in the turmoil. This "show of support" (as it was billed, without irony) elicited a cheer from the Fed's Jerome Powell and Treasury Secretary Janet Yellen, who called it "most welcome." (Of course it was welcome. They probably organized it.)
But consumers and depositors are still worried.
Meanwhile, on the other side of the Atlantic, the European Central Bank has raised interest rates by half a percentage point, saying it's as committed as ever to fighting inflation.
Yet rising interest rates are shaking banks in Europe as well. Just hours before the European Central Bank's announcement, the banking giant Credit Suisse got a $54 billion lifeline from Switzerland's central bank.
The financial system is facing a crisis of confidence. Finance ultimately depends on confidence—confidence that prices are under control, and confidence that banks are sound.
But ever since the near meltdown of Wall Street in 2008, followed by the milquetoast Dodd-Frank regulation of 2010 and the awful 2018 law exempting smaller banks, confidence in America's banks has been shaky.
November's revelation that the bitcoin giant FTX was nothing but a Ponzi scheme has contributed to the fears. Where were the regulators? Last Friday's revelation that Silicon Valley Bank didn't have enough capital to pay its depositors has added to the anxieties. Where were the regulators?
Credit Suisse has been battered by years of mistakes and controversies. It is now on its third CEO in three years. Why? Swiss banking regulations are notoriously lax, but American bankers have also pushed Europeans to relax their financial regulations, setting off a race to the bottom where the only winners are the bankers. As Lloyd Blankfein, then CEO of Goldman Sachs, warned Europeans, "operations can be moved globally and capital can be accessed globally."
One advantage of being a bank (whether headquartered in Silicon Valley or Switzerland) is you get bailed out when you make dumb bets. Another is you can choose where around the world to make dumb bets. Which is why central banks and bank regulators around the world must coordinate with each other to ensure that instead of a race to the bottom, it's a race to protect the public.
**
Banking is a confidence game. If the public loses confidence in banks, the financial system can't function.
In the Panic of 1907, when major New York banks were heading toward bankruptcy, Secretary of the Treasury George B. Cortelyou deposited $35 million of federal money in the banks. It was one of the earliest bank bailouts, designed to restore confidence.
But it wasn't enough. J.P. Morgan (the man who founded the bank) organized the nation's leading financiers to devise a private bailout of the banks, analogous to yesterday's. They redirected money between banks, secured further international lines of credit, and bought up the plummeting stocks of healthy corporations.
Confidence was restored, but the underlying weaknesses of the financial system remained. Those weaknesses became painfully and irrevocably apparent in the Great Crash of 1929.
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Anger Aimed at Troika's Ruthless Neoliberalism as Greece Exit Looms
With banks shuttered, capital controls in place, and democracy under threat, the world's eyes turn toward what the Greek people will decide
Jun 29, 2015
President of the European Commission Jean-Claude Juncker delivered a speech in Brussels on Monday that observers say has dramatically escalated the tensions surrounding a referendum vote in Greece next Sunday--a vote that could ultimately result in the country's exit from the Eurozone.
With global financial markets responding to Sunday's announcement that Greece's banks and stock exchange would be closed this week and the imposition of capital controls has been ordered, the crisis in Greece--or 'Grisis,' as its become known--has now reached a fevered pitch. On top of that, the people of the financially devastated nation have been asked to vote "yes" or "no" against a deal put forth by the so-called Troika, which consists of the European Commission, the International Monetary Fund, and the European Central Bank, in exchange for the continuation of cash infusions and extended credit.
Telling Greek voters to vote "yes" to accept the Troika's proposal, the Guardian's Graeme Wearden called Juncker's speech "jaw-dropping" in its implications. By telling the Greek people "not to commit suicide for fear of death," Wearden says Juncker has "effectively told the Greek people that they are choosing between the euro and the exit door on Sunday, that their government has lied to them, and that he has been their friend and ally at the negotiating table."
Meanwhile, on Monday the Syriza-led government announced that public transportation would be free this week in order to soften the blow of the economic situation and that certain banks would be offering unique access to pensioners who might otherwise face difficulty accessing their funds.
On Sunday evening, Prime Minister Alexis Tsipras made a televised address to the Greek people in order to explain the latest developments--including the decision to close the banks in the days ahead and to implement restrictive measures on withdrawals--and said, "the more calmly we confront difficulties, the sooner we will overcome them."
Watch:
Contrasting Tsipras' message with that of Juncker's on Monday, the Syriza Party has made it clear they are opposed to the terms of the deal on the table and will urge people to vote "no" on the proposal.
What happened over the weekend, according to New York Times columnist and Nobel-winning economist Paul Krugman, was what he termed a "reverse Corleone" -a reference to The Godfather film--in which the Troika made the Syriza government an offer it "couldn't accept." The commissioners, he argued, "presumably did this knowingly" to exert overt pressure on the left-wing government. Put aside the economics of the deal, explained Krugman, and "the ultimatum was, in effect, a move to replace the Greek government. And even if you don't like Syriza, that has to be disturbing for anyone who believes in European ideals."
"The EU and the IMF seem to be hell-bent on ruthlessly punishing Greece for daring to stand up against grossly unfair debt conditions that are causing enormous amounts of suffering. Refusing to allow a short delay for the referendum to take place is a brutal enforcement of unfettered capitalism over democracy and the needs of people."
--Nick Dearden, Global Justice Now
Nick Dearden, executive director of the UK-based Global Justice Now, slammed the Troika's collective behavior, specifically its refusal to allow a short extension of its bank liquidity program leading up to next Sunday's referendum vote.
"The hardline, inhumane policies of the EU now threaten to provoke a world crisis," Dearden told Common Dreams. "The EU and the IMF seem to be hell-bent on ruthlessly punishing Greece for daring to stand up against grossly unfair debt conditions causing enormous amounts of suffering. Refusing to allow a short delay for the referendum to take place is a brutal enforcement of unfettered capitalism over democracy and the needs of people."
With people across Europe calling for debt relief for Greece, Dearden continued, refusing to treat the Greek people with dignity is simply unforgivable. "This violent imposition of austerity in Greece will leave yet more blood on the hands of the EU's financial class," he said.
As the Greek Finance Minister Yanis Varoufakis tweeted over the weekend, what's at the heart of the debate right now is making sure that the people of Greece--the ones who have already sacrificed much at the altar of imposed austerity and the ones who will be most impacted by the acceptance or rejection of the deal--should be allowed to weigh in on the decision. In the wake of the referendum's announcement, he said:
Later, in a blog update posted on Sunday, Varoufakis described what happened on Saturday at the European Commission meeting:
The Eurogroup Meeting of 27th June 2015 will not go down as a proud moment in Europe's history. Ministers turned down the Greek government's request that the Greek people should be granted a single week during which to deliver a Yes or No answer to the institutions' proposals - proposals crucial for Greece's future in the Eurozone.
The very idea that a government would consult its people on a problematic proposal put to it by the institutions was treated with incomprehension and often with disdain bordering on contempt. I was even asked: "How do you expect common people to understand such complex issues?". Indeed, democracy did not have a good day in yesterday's Eurogroup meeting! But nor did European institutions. After our request was rejected, the Eurogroup President broke with the convention of unanimity (issuing a statement without my consent) and even took the dubious decision to convene a follow up meeting without the Greek minister, ostensibly to discuss the "next steps".
Can democracy and a monetary union coexist? Or must one give way? This is the pivotal question that the Eurogroup has decided to answer by placing democracy in the too-hard basket. So far, one hopes.
As tensions soar and fears of a financial panic set in, however, it's not just high-level Syriza officials who are saying that Greek voters would be right to reject the Troika's continued imposition of austerity, even if it means leaving the Eurozone's single currency.
In his Monday column at the Times, Krugman gave three reasons why Greece should vote "no" against the deal:
First, we now know that ever-harsher austerity is a dead end: after five years Greece is in worse shape than ever. Second, much and perhaps most of the feared chaos from Grexit has already happened. With banks closed and capital controls imposed, there's not that much more damage to be done.
Finally, acceding to the troika's ultimatum would represent the final abandonment of any pretense of Greek independence. Don't be taken in by claims that troika officials are just technocrats explaining to the ignorant Greeks what must be done. These supposed technocrats are in fact fantasists who have disregarded everything we know about macroeconomics, and have been wrong every step of the way. This isn't about analysis, it's about power -- the power of the creditors to pull the plug on the Greek economy, which persists as long as euro exit is considered unthinkable.
So it's time to put an end to this unthinkability. Otherwise Greece will face endless austerity, and a depression with no hint of an end.
Costas Panayotakis, associate professor of sociology at the City University of New York, argued much the same on Monday. "Since its election in January the Greek government has, in its attempt to reach an agreement, made many concessions to the eurozone's austerity agenda," explained Panayotakis. "The fact that, during the negotiation, Greece's European partners always asked for more suggests that they may not have truly desired an agreement, instead preferring to squash the only European government with the audacity to criticize the neoliberal consensus openly. The European response to Tsipras' announcement of a referendum also displays the long-standing aversion of European economic and political elites to democratic processes that allow European people to have a say over the future of the European project."
Meanwhile, Guardian foreign correspondent Jon Henley spoke with some of those Greeks who have been most affected by many years of financial ruin. As Henley reports:
After seven years of a crisis that has left 26% of Greece's workforce unemployed, 30% of its people below the poverty line, 17% unable to meet their daily food needs and 3.1 million without health insurance, it is hard to see how anything decided in Brussels or in Athens in the coming week will do much to change the lives of a large number of Greeks any time soon.
"Those that were already on the margins have been pushed right to the very, very edge, and those who were in the middle have been pushed to the margins," said Ioanna Pertsinidou of Praksis, a charity that runs day centres for vulnerable people and offers legal and employment advice.
"So many people - ordinary, low-to-middle income people with jobs and homes and their lives on track - have seen their lives go drown the drain so fast," Pertsinidou said. "People who never dreamed that one day they would not be able to pay their electricity bill, or feed their children properly."
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Greece on the Edge: Bailout Extension Rejected, But Referendum Still On
Future of financial assistance deal now put to a popular vote as Tsipras says creditors' deal 'clearly violate the European rules'
Jun 27, 2015
Update:
The Eurogroup has refused to extend Greece's current bailout deal, which is set to expire on June 30, days before a referendum is set to take place on the financial aid package currently being negotiated.
Greek Prime Minister Alexis Tsipras reportedly called European leaders, including German Chancellor Angela Merkel and French President Francois Hollande on Saturday to tell them, "Democracy is of the highest order in Greece and the referendum will take place regardless of the Euro group decision."
In a press conference on Saturday, Greek finance minister Yanis Varoufakis said that a deal between Greece and its creditors could still be reached before Tuesday's expiration date. But he slammed the Eurogroup for rejecting Greece's request to extend the current bailout to give the country enough time to put the proposed deal to a popular vote.
"The refusal of the eurogroup today to endorse our request for an extension of this agreement for a few days, a couple of weeks, to allow the Greek people to vote on their proposals - even when there is a very high probability that Greeks will go against our recommendation and vote yes - will certainly damage the credibility of the eurogroup as a democratic union of partner member state," Varoufakis said. "I'm very much afraid that damage will be permanent."
This story is developing. Follow the Guardian's live updates here.
Earlier:
Greek Prime Minister Alexis Tsipras this week called for a referendum on the financial aid deal that is currently at a standstill in negotiations, putting the future of the bailout package to a popular vote at the last minute as he rejected another austerity-heavy plan from creditors.
Greeks will now be asked to vote on whether to accept or reject the deal put forth by the Troika--the European Union, the European Central Bank, and the International Monetary Fund. The Syriza cabinet will meet Saturday to get the vote in line with the Greek constitution.
In a televised national address late Thursday night, Tsipras slammed the deal put forward by the Troika as "blackmail," saying the terms "clearly violate European social rules and fundamental rights." But he added that he would respect the outcome of the referendum.
The announcement followed an emergency meeting of his cabinet in Athens. Syriza officials emerged from the meeting saying they were confident Greeks would vote no on the "barbaric measures" of the deal, which include massive tax hikes and punishing cuts to social benefits--conditions which the Troika set in order to release bailout funds and which Tsipras had rejected over and over during high-stakes talks in Brussels.
"After five months of hard negotiations, our partners, unfortunately, ended up making a proposal that was an ultimatum towards Greek democracy and the Greek people, an ultimatum at odds with the founding principles and values of Europe, the values of our common European construction," Tsipras said in a national address late Thursday night.
Tsipras said Greece now faces a "historic decision" to respond to the deal by popular vote, adding that he had asked leaders of France, Germany, and the European Central Bank to extend their current bailout by a few days "so this democratic process could take place."
"These proposals, which clearly violate the European rules and the basic rights to work, equality and dignity, show the purpose of some of the partners and institutions was not a viable agreement for all parties, but possibly the humiliation of an entire people," he said during his address.
"The question is not whether we will remain in the eurozone," said government spokesperson Gavriel Sakellarides. "The Greek people should not be afraid."
The Guardian's correspondent in Greece, Helena Smith, elaborates:
The recipient of EUR240bn in bailout funds - the biggest rescue program in global financial history - Greece has seen its economy contract by more than a quarter, unemployment soar and poverty levels rise precipitously under the weight of draconian budget cuts and tax increased demanded by creditors.
"It is a democratic decision and the Greek people are being called to give a democratic answer. And that answer is going to be a resounding no," Lafazanis told Kontra TV.
"If the Greek people say a big no, it is going to be impossible for those who wield power not to take note unless democracy no longer exists."
Echoing that sentiment, the Greek finance minister, Yanis Varoufakis, tweeted: "Democracy deserved a boost in euro-related matters. We just delivered it. Let the people decide. (Funny how radical this concept sounds!)."
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'The People Will Not Be Blackmailed': Thousands March in Athens Against Austerity
Protesters urge ruling Syriza Party to stand up to international creditors and reject further cuts to public services and goods
Jun 21, 2015
Throngs flocked to Athens on Sunday to call on the ruling Syriza party to stand up to international creditors and reject further austerity measures.
In the second mass demonstration this week alone, thousands of protesters chanted "No to the euro" and "The people will not be blackmailed."
"We're here to show there are a lot of us," protester Katherina Sergidou, a member of Syriza, told The Irish Times. "A big window has opened--a window of change."
"I believe we have the power to build a society here in Greece where, even without a lot of money, we have our dignity," Sergidou added.
Prime Minister Alexis Tsipras of the ruling Syriza party is slated to meet with heads of the European Commission, the European Central Bank, and the International Monetary Fund on Monday.
The emergency meeting falls ahead of the Tuesday deadline for a massive payment to the IMF.
Greece's lenders have sought to impose stringent austerity measures in exchange for relief funds. But protesters Thursday urged Syriza officials, elected on an anti-austerity pledge, to reject more cuts.
Meanwhile, some within the Syriza Party are openly questioning whether a Greek Exit from the Eurozone or Grexit, is preferable to the terms of the country's creditors.
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As Debt Crisis Spirals, Greeks Declare: 'Our Lives Don't Belong to the Lenders'
Thousands of demonstrators gathered outside the Greek parliament building to pledge their ongoing support for Syriza and against austerity
Jun 18, 2015
With strained negotiations between Greece and its European lenders at a seeming impasse--and the prospect of a Greek exit from the eurozone, or "Grexit," looming large--thousands rallied in central Athens on Wednesday night, in a show of support for the leftist Syriza party and Prime Minister Alexis Tsipras, who has so far resisted the creditors' push for deeper cuts and further austerity.
Close to 3,000 demonstrators gathered outside the Greek parliament building in Syntagma Square, holding signs and banners with slogans like, "Our lives don't belong to the lenders" and "Stop Austerity, Support Greece, Change Europe."
They called on the International Monetary Fund (IMF), the European Central Bank, and the European Commission--who have demanded more budget cuts in return for desperately needed frozen aid--to respect the mandate that voters gave to the Syriza party, which won the January parliamentary elections on an anti-austerity platform.
"In a carnival atmosphere, Greeks young and old gathered through social media, holding banners calling for an end to the austerity policies the country has suffered under for five years," The Telegraph reported. "Polls continue to show overwhelming support for the euro across Greece, but the terms of this membership should not 'humiliate' the country, said Panagiota Bleta, a 40-year old Athenian demonstrator."
Bleta told the Telegraph, "We just want our dignity back. We don't want a deal where we stay in the euro and suffer a humiliation. It's time to create a Europe of equals, where Greece is not part of a third-speed Europe."
Of the deadlock, Reuters reports:
Neither side has shown any sign of yielding, with creditors insisting it is up to Greece to make concessions to secure a cash-for-reforms deal so the government can honor looming debt repayments and avoid a potentially disastrous default.
Far from giving ground, Greek Prime Minister Alexis Tsipras launched a new attack on the lenders in an article in a German newspaper, slamming what he called their "blind insistence" on pension cuts he said would worsen his country's crisis.
At Wednesday evening's demonstration, protesters said they had Tsipras's back--and warned him not to back down.
"Being here today can be read in two ways," Giannis M. who rallied at Syntagma, told the Athens News Agency-Macedonian Press Agency. "On the one hand we pressure the government not to give in. The people will always be here like they were five years ago on Syntagma. On the other hand, we show our lenders that the government is not alone, people support it."
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The Economic Consequences of Austerity
On 5 June 1919, John Maynard Keynes wrote to the prime minister of Britain, David Lloyd George, "I ought to let you know that on Saturday I am slipping away from this scene of nightmare. I can do no more good here." Thus ended Keynes's role as the official representative of the British Treasury at the Paris Peace Conference. It liberated Keynes from complicity in the Treaty of Versailles (to be signed later that month), which he detested.
Why did Keynes dislike a treaty that ended the state of war between Germany and the Allied Powers (surely a good thing)?
Jun 06, 2015
On 5 June 1919, John Maynard Keynes wrote to the prime minister of Britain, David Lloyd George, "I ought to let you know that on Saturday I am slipping away from this scene of nightmare. I can do no more good here." Thus ended Keynes's role as the official representative of the British Treasury at the Paris Peace Conference. It liberated Keynes from complicity in the Treaty of Versailles (to be signed later that month), which he detested.
Why did Keynes dislike a treaty that ended the state of war between Germany and the Allied Powers (surely a good thing)?
Keynes was not, of course, complaining about the end of the world war, nor about the need for a treaty to end it, but about the terms of the treaty - and in particular the suffering and the economic turmoil forced on the defeated enemy, the Germans, through imposed austerity. Austerity is a subject of much contemporary interest in Europe - I would like to add the word "unfortunately" somewhere in the sentence. Actually, the book that Keynes wrote attacking the treaty, The Economic Consequences of the Peace, was very substantially about the economic consequences of "imposed austerity". Germany had lost the battle already, and the treaty was about what the defeated enemy would be required to do, including what it should have to pay to the victors. The terms of this Carthaginian peace, as Keynes saw it (recollecting the Roman treatment of the defeated Carthage following the Punic wars), included the imposition of an unrealistically huge burden of reparation on Germany - a task that Germany could not carry out without ruining its economy. As the terms also had the effect of fostering animosity between the victors and the vanquished and, in addition, would economically do no good to the rest of Europe, Keynes had nothing but contempt for the decision of the victorious four (Britain, France, Italy and the United States) to demand something from Germany that was hurtful for the vanquished and unhelpful for all.
The high-minded moral rhetoric in favour of the harsh imposition of austerity on Germany that Keynes complained about came particularly from Lord Cunliffe and Lord Sumner, representing Britain on the Reparation Commission, whom Keynes liked to call "the Heavenly Twins". In his parting letter to Lloyd George, Keynes added, "I leave the Twins to gloat over the devastation of Europe." Grand rhetoric on the necessity of imposing austerity, to remove economic and moral impropriety in Greece and elsewhere, may come more frequently these days from Berlin itself, with the changed role of Germany in today's world. But the unfavourable consequences that Keynes feared would follow from severe - and in his judgement unreasoned - imposition of austerity remain relevant today (with an altered geography of the morally upright discipliner and the errant to be disciplined).
Aside from Keynes's fear of economic ruin of a country, in this case Germany, through the merciless scheduling of demanded payments, he also analysed the bad consequences on other countries in Europe of the economic collapse of one of their partners. The thesis of economic interdependence, which Keynes would pursue more fully later (including in his most famous book, The General Theory of Employment, Interest and Money, to be published in 1936), makes an early appearance in this book, in the context of his critique of the Versailles Treaty.
"An inefficient, unemployed, disorganised Europe faces us," says Keynes, "torn by internal strife and international hate, fighting, starving, pillaging, and lying." If some of these problems are visible in Europe today (as I believe to some extent they are), we have to ask: why is this so? After all, 2015 is not really anything like 1919, and yet why do the same words, taken quite out of context, look as if there is a fitting context for at least a part of them right now?
If austerity is as counterproductive as Keynes thought, how come it seems to deliver electoral victories, at least in Britain? Indeed, what truth is there in the explanatory statement in the Financial Times, aired shortly after the Conservative victory in the general election, and coming from a leading historian, Niall Ferguson (who, I should explain, is a close friend - our friendship seems to thrive on our persistent disagreement): "Labour should blame Keynes for their election defeat."
If the point of view that Ferguson airs is basically right (and that reading is shared by several other commentators as well), the imposed austerity we are going through is not a useless nightmare (as Keynes's analysis would make us believe), but more like a strenuous workout for a healthier future, as the champions of austerity have always claimed. And it is, in this view, a future that is beginning to unfold already in our time, at least in Britain, appreciated by grateful voters. Is that the real story now? And more generally, could "the Heavenly Twins" have been right all along?
***
There are many odd features of the experience of the world since the crisis of 2008, beginning in the United States. One of them is that what began as a clear failure of the market economy (particularly fed by misbehaving financial institutions) soon looked like a problem of the overstretched role of the state. The crisis, when it came, was seen - rightly, I believe - as a failure of the operation of the private financial institutions, and led to a huge demand for reinstating some of the state regulations, particularly of the financial markets, that had been gradually eliminated in the US economy through piecemeal eradication (beginning in the Reagan presidency but continuing through Democratic administrations). However, after the massive decline in 2008 of financial markets and of business confidence had been halted and to some extent reversed through the intervention of the state, especially through stimulating the economy, often paid for by heavy public borrowing, the state had large debts to deal with. The demand for a smaller government which had begun earlier, led by those who were sceptical of extensive public services and state provision, now became a loud chorus, with political leaders competing with each other in frightening people with the idea that the economy could not but collapse under the burden of public debt.
Similarly, at the international level, the global free fall following the 2008 crisis was largely halted by the move, under the visionary leadership of Gordon Brown, for a meeting of the governments of the newly formed G20 in April 2009 in London, each promising to do its best not to feed the downward spiral by domestic complicity. This turned a page in the history of the crisis successfully, but soon the story changed, with the governments being asked to get out of the way before they ruined healthy business activities.
Turning to the management of debts, suddenly the idea of austerity as a way out for the depressed and heavily indebted economies became the dominant priority of the financial leaders of Europe. Those with an interest in history could easily see in this a reminder of the days of the Great Depression of the 1930s when cutting public expenditure seemed like a solution, rather than a problem. This is, of course, where Keynes made his definitive contribution in his classic book, the General Theory, in 1936. Keynes ushered in the basic understanding that demand is important as a determinant of economic activity, and that expanding rather than cutting public expenditure may do a much better job of expanding employment and activity in an economy with unused capacity and idle labour. Austerity could do little, since a reduction of public expenditure adds to the inadequacy of private incomes and market demands, thereby tending to put even more people out of work. There is, of course, more to Keynes's full theory than that, but the common-sense summary just presented is gist enough.
However, the financial leaders of Europe had a different reading - from Keynes and from a great many mainstream economists - of what was needed, and they were not going to budge from their understanding. As it is quite common these days to blame economists for failing to see the real world, I take this opportunity to note that very few professionally trained economists were persuaded by the direction in which those in charge of European finances decided to take Europe. The European debacle demonstrated, in effect, that you do not need economists to generate a holy mess: the financial sector can generate its own gory calamity with the greatest of elegance and ease. Further, if the policy of austerity deepened Europe's economic problems, it did not help in the aimed objective of reducing the ratio of debt to GDP to any significant extent - in fact, sometimes quite the contrary. If things have started changing, over the past few years, even if quite slowly, it is mainly because Europe has now started to pursue a hybrid policy of somewhat weakened fiscal austerity with monetary expansion. If that is a half-hearted gesture towards Keynes, the results are half-hearted, too.
There is, in fact, plenty of evidence in the history of the world that indicates that the most effective way of cutting deficits is to resist recession and to combine deficit reduction with rapid economic growth. The huge deficits after the Second World War were easily tamed with fast economic growth in the postwar years (I will come back to this issue later). Something similar happened during the eight years of Bill Clinton's presidency of the United States, when Clinton began with a huge deficit and ended with none, thanks largely to rapid economic growth. Again, the much-praised reduction of the Swedish budget deficit during 1994-98 occurred in a period of fairly fast growth of GDP. Despite political deadlocks and a largely non-functional Congress, the United States has been much smarter than Europe, on this occasion, in making use of this central understanding. The ratio of deficit to GDP has fallen in the US thanks to economic growth, which - rather than austerity - is of course the well-tried way of achieving the desired result.
Had the policy leaders of Europe (adherents of a peculiarly narrow view of financial priority) allowed more public discussion, rather than taking unilateral decisions in secluded financial corridors - encouraging no public discussion - it is possible that the policy errors could have been prevented, through the standard procedures of deliberation, scrutiny and critique. It is remarkable that this has not happened in the continent that gave the world the basic ideas of institutional democracy. The big epistemic failure in missing the lessons of the past on revival, deficit reduction and economic growth is not only a matter of wrong turns taken by the financial leaders, including the European Central Bank, but also of the democratic deficit in Europe today. It is no consolation that most of the governments in the eurozone that deployed the strategy of austerity lost office in public elections that followed. Democracy should be about preventing mistakes through participatory deliberations, rather than about making heads roll after mistakes have been made. This is one of the reasons why John Stuart Mill saw democracy as "government by discussion" (a phrase coined, along Millian lines, by Walter Bagehot), and this demands discussion preceding public decisions, rather than following them.
***
How was it possible, it has to be asked, for the basic Keynesian insights and analyses to be so badly lost in the making of European economic policies that imposed austerity? Some of the dominant figures in the financial world have had a long-standing scepticism of the economic relations on which Keynes focused which is being emended only now, with reality checks being made in observations of the penalty of the neglect of Keynesian relations. The bold plan by the new president of the European Central Bank, Mario Draghi, which we have every reason to welcome, to deliver a trillion euros of "quantitative easing" (not unlike expanding the money supply) - with decisive expansionary effect - is a result of that belated recognition which is slowly changing the European Central Bank: that expansion rather than contraction is what the economy needs.
If failing to understand some basic Keynesian relations is a part of the explanation of what happened, there was also another, and more subtle, story behind the confounded economics of austerity. There was an odd confusion in policy thinking between the real need for institutional reform in Europe and the imagined need for austerity - two quite different things. There can be little doubt that Europe has needed, for quite some time, many serious institutional reforms - from the avoidance of tax evasion and the fixing of more reasonable retiring ages to sensible working hours and the elimination of institutional rigidities, including those in the labour markets. But the real (and strong) case for institutional reform has to be distinguished from an imagined case for indiscriminate austerity, which does not do anything to change a system while hugely inflicting pain. Through the bundling of the two together as a kind of chemical compound, it became very difficult to advocate reform without simultaneously cutting public expenditure all around. And this did not serve the cause of reform at all.
This is a simple enough point, and it is surprising how difficult it has proved to be to get this across. I have to confess to humbling failure in making an impact on the policymakers through my efforts on this by addressing the European Commission, the IMF, the Bank for International Settlements, and joint meetings of the World Bank and the OECD, starting in the summer of 2009.
An analogy can help to make the point clearer: it is as if a person had asked for an antibiotic for his fever, and been given a mixed tablet with antibiotic and rat poison. You cannot have the antibiotic without also having the rat poison. We were in effect being told that if you want economic reform then you must also have, along with it, economic austerity, although there is absolutely no reason whatsoever why the two must be put together as a chemical compound. For example, having sensible retiring ages, which many European countries do not (a much-needed institutional reform), is not similar to cutting severely the pensions on which the lives of the working poor may depend (a favourite of austeritarians). The compounding of the two - not least in the demands made on Greece - has made it much harder to pursue institutional reforms. And the shrinking of the Greek economy under the influence mainly of austerity has created the most unfavourable circumstances possible for bold institutional reforms.
Another counterproductive consequence of the policy of imposed austerity and the resulting joblessness, for Keynesian reasons, has been the loss of productive power - and over time the loss of skill as well - resulting from continued unemployment of the young. The rate of youth unemployment is astonishingly high in many European countries today; more than half the young people in Greece have never experienced having a job. The very process of the formation of human capability, on which Adam Smith put emphasis as the real engine of economic success and human progress, has been quite badly mishandled through the tying together of uncalled-for austerity (which no country really needed) with necessary reform (which many European countries did need).
More than 200 years ago, Adam Smith specified with much clarity in The Wealth of Nations how to judge the good functioning of a well-run economy. Good political economy, Smith argued, has to have "two distinct objects": "first, to provide a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the publick services".
The father of modern economics, and the pioneering champion of the market system, did not have any doubt why the role of the state fits integrally into the demands of a good society. Public reasoning over generations has increasingly vindicated and supported Adam Smith's broad vision. There are good reasons to think that it would have done the same today had open and informed public dialogue been given a proper chance, rather than being ruled out by the alleged superiority of the judgements of financial leaders, with their breathtakingly narrow view of human society and a basic lack of interest in the demands of a deliberative democracy.
***
It is certainly true that the policy of austerity has been advertised as the reason behind the comparative success of the British economy. This comparison is, however, with Europe, which has been in a bigger hole than Britain, with a more vigorous imposition of austerity, particularly in some countries (Greece is of course the extreme example of that - with the big shrinking of its economy, rather than having economic growth). The relatively positive growth in recent years does not make Britain's overall experience of growth over the period of austerity particularly impressive, if we look beyond Europe. Not only is the price-adjusted GDP per capita in Britain today still lower than what it was before the crisis in 2008, but also, in the period of recovery from the low of 2009, GDP per capita has risen far more slowly in the UK than in the US and Japan (not to mention some of the faster-growing Asian economies).
Could the British voters, then, have missed the real story? That is possible, and I shall come to that possibility presently, but the voting figures do not quite bring out a groundswell of approval in favour of austerity. There is no question that Labour had a severely bad election, and has lost ground, not just in Scotland, and must rethink its priorities as well as strategies quite radically. But the parties forming the coalition government - the Conservatives and Liberal Democrats - had support from more than 59 per cent of the total vote in the election before last in 2010 (that is, before they sprang the surprise of austerity on the British public); yet the coalition parties together have managed to get only around 45 per cent in this election - after the experience of austerity. Not quite a heady success for the vote-getting ability of austerity. The Tories did get a clear majority of seats on their own (and have good reason to celebrate that outcome), but this achievement came with only 37 per cent of the votes. The success here is just like that of the Hindutva-oriented BJP in India in the elections last year, when it got 31 per cent of the ballots cast but a substantial majority of parliamentary seats. Before we start getting our economic theories from the reading of election results, we have to scrutinise a bit more the message that comes through from the votes and the seats in the constituency-based electoral systems that the UK and, following it, India happen to have.
What is not in doubt, however, is that the general public in the UK, following the crisis of 2008, has become increasingly nervous about the size of the public debt and also about the ratio of public debt to GDP. What is overlooked here is that while a national debt may have many costs (and it is not paranoiac to keep tracking it), it is not quite like an individual person's debt, which is owed to someone else (someone quite different). An internal national debt is mainly owed to another person in the same economy. Figures of seemingly large public debt may be handy enough to frighten a population with imagined stories of ruining the future generations, but the analysis of public debt demands more critical thinking than that, rather than drawing on a misleading analogy with private indebtedness.
There are two distinct issues here. First, even if we want to reduce public debt quickly, austerity is not a particularly effective way of achieving this (which the European and British experiences confirm). For that, we need economic growth; and austerity, as Keynes noted, is essentially anti-growth. Second, what is also important to note is that while panic may be easy to generate, the existence of panic does not show that there is reason for panic. No less importantly, the public has not always been scared stiff by the size of the public debt. The public debt-to-GDP ratio was very considerably larger in Britain in every year for two decades, from the mid-1940s to the mid-1960s, than it has been at any time since the crisis of 2008. And yet there was no panic then (when Britain was confidently establishing the welfare state), in contrast to the confused anxiety, not to mention the orchestrated fear, that seems to run down the spine of the terrorised British today, making austerity look like a fitting response.
When Britain went for pioneering the welfare state and established the National Health Service, among other ways of expanding the public services, with Aneurin Bevan inaugurating the Park Hospital in Manchester on 5 July 1948, the ratio of debt to GDP was larger than 200 per cent, much more than twice what it has been at any point in recent years. Had the British public been as successfully frightened about the debt ratio in those days, the NHS would never have been born, and the great experiment of having a welfare state in Europe (from which the whole world from China, Korea and Singapore to Brazil and Mexico would learn) would not have found a foothold. A decade later, when Harold Macmillan, as a buoyant new prime minister, told the British people in July 1957 that they had "never had it so good", the size of government debt was more than 120 per cent of GDP - immensely higher than the ratio of roughly 70 per cent in 2010 when Gordon Brown was accused of mortgaging Britain's future by profligacy.
The scare was not there from the late 1940s through the 1960s, with Labour as well as Conservative governments in office, perhaps because the scarers were more scarce then. And armed with good public services and a flourishing market economy, Britain steadily reduced its debt-to-GDP ratio through economic growth, while establishing the welfare state and a huge array of new public services.
Public knowledge and understanding are indeed central to the ability of a democratic government to make good policies. The Economic Consequences of the Peace ends by pointing to the connection between epistemology and politics, and arguing that we can make a difference to the world only by (in Keynes's words) "setting in motion those forces of instruction and imagination which change opinion". The last sentence in the book affirmed his hope: "To the formation of the general opinion of the future I dedicate this book." In that dedication, there is enlightenment as well as optimism, both of which we strongly need today.
This is an edited version of a lecture delivered by Amartya Sen at the Charleston Festival in Firle, East Sussex, on 23 May
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Economists Predict 'No Gain, More Pain' for Greece
If alternatives are not pursued, Greece faces many years of economic pain along austerity path
Feb 23, 2012
If the European authorities are unwilling to abandon their destructive prescription of deeper cuts and continued austerity, Greece should seriously consider a planned default and exit from the euro, according to a new paper by the Center for Economic and Policy Research (CEPR).
"The IMF has consistently underestimated the depth of the Greek recession," said Mark Weisbrot, CEPR Co-Director and lead author of the paper. "At some point, it becomes rational for Greeks to ask, is the euro worth this kind of punishment?"
The paper (pdf) discusses the most recent agreement between the Greek government and the so-called Troika -- the European Central Bank (ECB), the International Monetary Fund (IMF), and the European Commission (EC) -- which included reducing public employment by 150,000 workers by 2015, cutting the minimum wage by 20 percent (and by 32 percent for those under the age of 25); and weakening of collective bargaining in exchange for a 130 billion Euro package. "All of this," according to CEPR, "will have the effect of reducing living standards for workers and redistributing income upward."
One of the many problems of the austerity push is that it comes from European authorities who look at Greece's situation "mainly from a creditor's point of view," says the report. From the Troika's point of view, it is "not necessarily bad that the adjustment is painful" for the Greek people.
Ideologically/politically, [the Troika wants] a smaller government in Greece, with less regulation, much lower wages, and weaker unions. [...] The IMF lists reducing the size of the public sector as an "essential element" of its program.
Louise Armistead, writing for The Telegraph, says that "Unlike the troika's messy efforts, the CEPR's arguments are clear and compelling." And continues:
Greece has already suffered among the worst losses of output from financial crises in the 20th and 21st centuries, says the CEPR. Even if the economy starts to recover, Greece will have lost 15.8% of GDP since its peak.
Greece is paying crippling interest rates of 6.8% of GDP - one of the highest rates in the world. In the eurozone, only two are above 4% - Italy and Portugal. It seems unlikely that the bailout will bring the interest payments down.
Mark Weisbrot and Juan Antonio Montecino, the authors of the paper, argue that the "most important problem with the commitments that Greece has made to the European authorities is that its fiscal policy is pro-cyclical - that is, the government has been, and is committed to, tightening its budget while the economy is in recession. In 2010-11, the Greek government adopted measures to cut spending by 8.7 percent of GDP. This is comparable to cutting U.S. federal spending by $1.3 trillion."
Greek unemployment hit a record of 20.9 percent in November and the IMF forecasts that it will still be at 17 percent in 2016. Employment as a percentage of the working age population is now less that it was in 1994.
Following Argentina's path the sane alternative?
The authors also look briefly at the alternative of a planned default and exit from the euro, considering that such an outcome might happen in any case due to recurrent crises and continued recession. They look at the case of Argentina, which unsuccessfully tried an internal devaluation with a deep recession from 1998-2001, as a relevant comparison. After default in December 2001 and devaluation a few weeks later, the Argentine economy shrank for just one quarter (a 4.9 percent loss of GDP), but then recovered and grew by more than 63 percent over the next six years.
"Argentina's success after its default and devaluation show that rapid recovery is possible," said Weisbrot. "It was not, as many claim, a commodities boom, or even export-driven growth. Argentina recovered rapidly because it was able to abandon the kinds of destructive economic policies that Greece is following today, and switch to pro-growth policies."
The paper notes that Argentina reached its pre-recession GDP in just three years, while Greece is expected to take at least a decade to reach that benchmark.
An exit from the Euro would not be without risk, the authors acknowledge. They write: "A lot would depend on how skillfully and quickly the authorities could move from the financial crisis that would ensue, to economic recovery. As noted.. it took just one quarter for the economy to resume growth in Argentina after the default/devaluation."
In the case of Greece, there is no way to know in advance how severe the financial crisis, and associated loss of output and employment, would be if the government were to decide to default and exit from the euro. And that is what makes this decision difficult for the government or any political party: on the other side of the equation, it is not known when the Greek economy will begin to recover under the current program. So, although the current program has failed miserably and can be expected to continue to fail in the foreseeable future, there is considerable uncertainty regarding the effects of either choice. And for political leaders, it may be easier to accept the troika's program as though -as the European authorities and most of the media frame it - there is no choice.
But, the idea that default/exit would be a catastrophe on the order of a Great Depression is false. The Great Depression was not the result of any one-time event; it was a long series of bad policydecisions over years. [...] A default/exit would likely bring on a financial crisis, but it would not by itself cause a Great Depression.
And finally, "Given the prognosis for Greece under the current program, and the probability that it will be plagued with recurrent crises and could even end in a chaotic default, a planned default/exit option could very well be the more prudent choice. It should be taken seriously as an alternative."
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