The announcement by the European Union, its leading members and institutions of a gargantuan €750 billion in emergency loan facilities is designed to stave off a specifically European second leg of the global credit crunch. The initial reaction was to boost financial markets both in Europe and beyond. However, the emergency is itself an indictment of policy to date and there is no guarantee the loan will be successful.
The immediate cause of the crisis was the negative reaction of financial markets to the package measures announced just one week earlier. It was supposed to address the crisis in Greece and the negative impact it was having on the euro, global stock markets and government bond markets. But Greek society and European financial markets remained in turmoil in the wake of the prior announcement, not least because of the decision to adopt swingeing austerity measures in Greece. These include higher indirect taxes, mainly paid by the poor, rising by between 2 and 10 per cent. Pension entitlements will now depend on 40 years’ work – from 37 years previously. There are widespread pay cuts and pay freezes as well as job losses in the public sector. Rule changes also allow the private sector to shed jobs more easily. Altogether, the fiscal squeeze will amount to 11 per cent of gross domestic product. This is one of the most severe fiscal tightening by an industrialised country in the period since the Second World War and only the 1930s provide any precedents. The austerity policy failed then and led directly to the Great Depression. It is also failing now.
The authors of the Greek austerity programme, in the EU, the European Central Bank and the International Monetary Fund, have no explanation as to why an austerity package supposedly designed to reassure financial markets led to the opposite. This is reflected in the yields, or interest rates, on government debt. These continued to rise even after the announcement of the bailout package of €120 billion in loans to Greece and the passing of the austerity legislation by the Greek parliament.
This is because the effect of fiscal austerity measures has been disastrous on the minority of European economies that have adopted them. Services, welfare, incomes and pay have all been slashed. Because of this, the taxes on which governments rely to service their debts have also plunged and actually led to wider deficits. This inconvenient truth cannot be acknowledged by those who have forced Greece to adopt these measures.
Yet the verdict from the Standard & Poor’s ratings agency is clear. S&P sparked the latest episode in the crisis by downgrading both Portugal and Greece – in effect arguing that the risk of defaulting on their debts has increased. According to a report in the New York Times on April 28: “Officials from Standard & Poor’s said the main reason for downgrading the debt of Greece and Portugal was the prospect that forced austerity packages would be an even bigger drag on economic growth.”
That is, the slash-and-burn approach is not only disastrous economically, but also increases both the budget deficits and the interest rates on government debt.
Fiscal austerity measures have only been forced on a minority of European governments. The latest €750 billion package included further austerity measures forced on Portugal and Spain. Previously, the Spanish Socialist government had resisted demands for bigger cuts, arguing they would be damaging and counter-productive. By contrast, the majority of EU economies and others, such as the United States, Japan and China, did the opposite and adopted fiscal stimulus to restore the economy and the tax revenues which it generates. In Britain, the 2009 Budget was a stimulative one that softened the recession and actually lowered projections for the deficit. Unfortunately, the stimulus was not repeated in the 2010 Budget. The EU stimulus measures averaged 4.6 per cent of GDP, more than double Britain’s. By and large, they have been successful – reviving the economy and stabilising deficit levels.
The big European powers, the ECB and the IMF have forced on Greece, and to a lesser extent Portugal and Spain, a policy which is the opposite of their own, successful stimulus measures. This reveals the nature of the bailout that is being offered. The vast sums, which are collected ultimately from the taxpayers of the EU and other nations, will not be used to revive the European economies nor invested to improve productivity and competitiveness. Instead, the sums are to be used to ensure that countries carry on paying debt interest costs, at the price of further borrowing. It’s little wonder there has been scepticism in financial markets that this is sustainable.
At the end of 2009, total foreign claims on all Greek entities amounted to $217 billion, of which $193 billion was held by European banks. They are holders of Greek debt and the recipients of its interest payments. In that way, with money from taxpayers being used to bailout banks holding Greek debt, the bailout is in effect an international version of the national bank bailouts which are so detested across the world. The ultra-wealthy in Greece live tax-exempt lives. Shipping is entirely tax-exempt, while the majority of the hidden overspending by successive Greek governments was on the military. An alternative programme of reasonable taxation on the wealthy and bringing Greek military spending down to the EU norm would reduce the deficit overnight to close to 3 per cent of GDP.
Instead, there is a bailout, to be serviced by the section of Greek society that does actually pay taxes – the average paid and the low paid. The bailout is a bailout only for the bondholders – European banks. Worse, the Greek economy has been bound hand and foot, and ordered to service higher debt levels. Even the speculators and the ratings agencies can see this is impossible. The huge emergency measures were rushed through only as bank shares led stock markets downwards, as the risk of a Greek default rose. But even then, further austerity measures were imposed on Portugal and Spain, which will only push their taxes lower and hamper their ability to service their debts.
Bank bailouts only incur further debts and do nothing to improve the economy. As the S&P analysts show, austerity measures only weaken the economy, depress taxes and widen the deficit.
