Greece: Bankers bailed out, workers sold out

By Mike Andrew

Greece’s debt crisis came to a head on November 11, when socialist Prime Minister George Papandreou resigned to make way for a coalition “national unity government.”

The new Prime Minister, Lucas Papademos, is a former Vice President of the European Central Bank committed to pushing ahead with the package of austerity measures demanded by European bankers in return for a “bailout” of Greek debts.

This “bailout” properly speaking is not a bailout of Greece, still less a bailout of Greek workers, but a bailout of the German and French banks which invested in Greek bonds and now stand to lose substantial assets if Greece defaults on its debts.

Some 20% of the bailout money Greece receives is slated to go to recapitalize Greek banks, and another 20% must be invested in top-rated AAA bonds that can be used as collateral in future debt-swap deals with lenders.

The austerity program the EU has imposed on Greece is not designed to help Greece repay its debts – or if it is, it is sadly misdirected. In fact, their austerity program is designed to impose the EU economic model which views inflation as the main economic risk.

In an effort to reduce Greece’s deficits and keep inflation below the EU-sanctioned maximum of 2%, the Greek government was compelled to cut wages and pensions, eliminate COLAs, and reduce the number of public sector workers by one-third.

Last year unemployment hit almost 19%, with the rate for workers under 30 going to almost 40%. The Greek economy as a whole contracted by 4.5% in 2010.
If the goal was to reduce Greece’s debt-to-GDP ratio, the austerity program was clearly misdirected.

Papandreou was elected Prime Minister in 2009 on an anti-austerity platform, when the debt crisis was only just breaking.

The right-wing New Democracy Party, which held power from 2004 to 2009, precipitated the debt crisis by cutting income and social security taxes and then cooking the books to conceal the real dimensions of the resulting budget deficit.
Instead of the EU-approved 3% deficit, or the rumored 6% “real” deficit, Papandreou found the deficit was almost 13% when he took office. Unemployment at that time was over 10%.

What made Greece’s situation even worse was that it had joined the Eurozone in 2001, and therefore no longer controlled its own money supply.

Papandreou’s father, the late Andreas Papandreou, who was Prime Minister in 1981-1989 and again in 1993-1996, had brought his country an unprecedented period of economic prosperity by an admittedly inflationary policy – financing public works projects, and wage and pension increases by increasing the money supply.

That option was no longer open in the current crisis, and George Papandreou realized he had no choice but to ask for a restructuring of Greece’s debt, the consequence of which was the austerity package demanded by European bankers.
Papandreou’s seemingly reasonable proposal to put the austerity policy up for a vote was vetoed by Greece’s creditors, including the United States.

The referendum proposal did have one positive result, however. It forced the right-wing opposition into entering a national unity government and accepting shared responsibility for the austerity measures.

The long term future for the Greek economy remains in doubt, as does the issue of whether Greece will retain the Euro or try to return to the drachma, its former national currency.

Greece, Part II: A different economic model

By Mike Andrew

Last month in Part I of this article, we saw that the economic “reforms” forced on Greece by the EU harmed the country’s working families and caused its economy to contract.

In this article, we’ll look at an alternative economic model actually implemented in Greece by the socialist PASOK party in the 1980s.

Since modern Greece was recognized as an independent country in 1832, it has had to contend with very weak growth in its domestic economy.

This in turn led to twin economic problems.

First, there were more Greek workers than the job market could accommodate, and some way had to be found to cope with the large number of unemployed workers.

Second, the country was particularly vulnerable to global economic trends, to penetration by foreign capital, and to political control by richer countries.

The military dictatorship that ruled Greece from 1967 to 1974 was the last gasp of the old system of political intervention by ambitious army officers.

It was also the first gasp of a new neo-liberal approach to economic growth.

The dictatorship promoted foreign investments in Greece, especially in the tourism industry, borrowed heavily from foreign banks to finance public-private construction projects, and cracked down brutally on Greece’s labor unions.

When Andreas Papandreou – the father of the present prime minister – became prime minister in 1981, he adopted measures to stimulate internal markets.

A socialist and an economist of international standing, one-time chair of the Economics Department at UC Berkeley, Andreas scorned the supply-side economics promoted by Ronald Reagan and Margaret Thatcher.

Instead, he believed that demand for Greek products, and therefore Greek labor, inside Greece itself would be the driver for economic growth and national prosperity.

Andreas raised wages for public employees and also raised pensions for retirees, and he introduced COLAs for both wage-earners and pensioners, giving Greeks more money to spend.

By lowering the retirement age, he also made room for younger workers to enter the job market.

And he substantially increased spending in the public sector with a variety of construction projects, including restoration of the Parthenon and other historical sites.

Andreas financed this economic stimulus program not mainly by borrowing and not mainly by raising taxes, although he did both, but by increasing the money supply – “printing more money” as conservative economists put it.

This policy was inflationary, and required a devaluation of the drachma, Greece’s national currency at the time, in October 1985, but it produced a period of economic prosperity unparalleled in modern Greek history.

Inflation harms banks, which lend money at fixed interest rates, and it harms people with substantial cash assets in the bank, who see the value of their deposits erode.

On the other hand, inflation doesn’t necessarily harm wage-earners or pensioners who live pay check to pay check, as long as they get COLAs that help keep income ahead of the rate of inflation.

Greeks saw their real incomes, adjusted for inflation, rise by 26% during Andreas’s first two terms as prime minister in 1981-1989.

To give an idea how significant this is, let’s look at US incomes. The median household income in the US in 2009 was $50,221. A 26% increase would bring that household’s income to $62,776.25.

Would that extra $12,555.25 make a difference to a working family? You bet it would!

Andreas’s economic policies were not completely successful, however.

Unemployment went up during his administration, in part because increased social benefits and general economic prosperity made unemployed Greeks want to stay at home rather than emigrate.

Andreas also believed that his go-it-alone foreign policy – which included withdrawing Greek troops from NATO command – required continued high military spending, which led to borrowing to finance weapons purchases, and ultimately increased indebtedness to US and European banks.

The devaluation of the drachma stimulated growth in the tourist industry, which meant that Greece continued to be vulnerable to global economic trends.

Nevertheless, when Andreas Papandreou retired in 1996 and died soon after, Greece was in the best economic position it had ever been in its modern history.

Is Greece the future of the US?

Maybe, but not in the way conservatives think.

By Mike Andrew

“Greece is the future of the US,” conservatives warn, meaning that this country is headed for a similar economic and social melt-down unless our government slashes social spending, cuts taxes, lays off public sector workers, and balances its budget.

Riots in Athens and general strikes that have paralyzed Greece underscore exactly how serious all this is. Is this really the future of the US?

This is the first installment of a two-part article that will look at Greece’s economic crisis and what lessons the US can learn from it.

In Part I, we’ll see if the austerity measures forced on Greece by European banks have helped or hurt the Greek economy.

In Part II, we’ll look at a completely different approach to Greek economic development, one that was tried by the socialist PASOK party in the 1980s

When George Papandreou led PASOK back into power in 2009, after five years of right-wing government, he faced three very real problems.

First, the previous PASOK administration led by Kosta Simitis (1996-2004) had joined the Eurozone – a move opposed by the left wing of PASOK.

Second, the Simitis government took advantage of the easy credit opened up by participation in the Eurozone to borrow heavily from European banks.

Thus, when Papandreou came into office, his country was no longer in control of its own money supply and owed a lot of money to foreign banks.

To make matters worse, the right-wing New Democracy government that preceded Papandreou had cut income and social security taxes to benefit its base, and then cooked the books to conceal the real level of Greece’s budget deficit.

Instead of the official 3% of GDP budget deficit allowed by the EU, or the rumored “real” deficit of 6%, the actual rate turned out to be almost 13%.

Finally, the Greek economy suffered from persistently slow growth and high unemployment rates, especially among younger workers.

Greek workers work harder than most. According to the Organization for Economic Cooperation and Development, Greek workers work some 2,120 hours every year, compared to 1,760 for US workers, and a mere 1,430 a year for Germans.

The problem is that there are more Greeks who want to work these long hours than there are jobs available. That’s one of the reasons emigration has always been part of Greek life, as Greeks left for the US or Australia to find work.

One of the promises made by the EU to small and relatively poor countries like Greece was that with EU membership would help in growing their economies.

Nevertheless, when Papandreou went to the EU for a bailout, he found that the EU’s economic agenda was not a growth agenda at all, but a contraction agenda.

The EU demanded a program of spending cuts very similar to what Republicans demand here in the US.

The “size of government” is to be reduced by failing to replace government workers as they retire.

Wages of workers in state-owned industries are to be cut by 30% and there will be a cap on wages and bonuses.

Just to show how damaging this will be, the median household income in the US in 2009 was $50,221. A 30% cut in pay would be more than $15,000 cut out of that family’s budget.

The retirement age in Greece has already been increased from 52 to 59, and it will be raised to 65.

These measures have not yet been fully implemented but unemployment already hit new record highs.

The Greek jobless rate went to 16.2% in March from 15.9% in February. Among workers under 30, the unemployment rate is more than 36%.

The social safety net is also on the chopping block, starting with pensions and benefits for retirees, and COLAs will be eliminated.

While these so-called “reforms” are still being implemented, Greece’s GDP declined by more than 4% in 2010. It will certainly decline even further this year.

While we can feel sorry for Greek workers and their families, the thing to take away from the Greek case is that the EU’s austerity program is not much different from the one proposed by fiscal conservatives in the US.

Do they want this be the future of the US?

(Mike Andrew is the Associate Editor of The Retiree Advocate)