Greece, Austerity, and the Struggle for Europe
View(s):In 1990 West Germany imposed on the East a trust fund agency (Treuhand in short) to take over and rapidly privatise the vast public assets of the former Communist state. In leading the imposition of a Treuhand on Greece as part of the latest ‘bailout’, the German Finance Minister Wolfgang Schäuble essentially reprised his role in the German reunification negotiations.
Protesters from the Communist-affiliated trade union PAME shout slogans during an anti-austerity demonstration outside the Labour Ministry in central Athens, Greece, August 5, 2015. The parliamentary spokesman for Greece's ruling Syriza party urged it on Wednesday to unite behind a new funding agreement, saying the country wanted a full bailout immediately rather than a bridge loan. The placard reads “No to layoffs. Steady and permanent jobs for everybody”. REUTERS/Yiannis Kourtoglou
The Treuhand imposed on East Germany was an economic and political failure. It lost more money than it earned, led to millions of job losses, and was resented in East Germany. Only massive social transfers from West to East and a large bailout programme mitigated the devastating consequences. But Greece will not have that cushion of course.
Essentially a fire-sale vehicle under German supervision but domiciled in Luxembourg, the proposed Treuhand was to oversee a 3-year programme of privatisation of prime Greek public assets (already undervalued due to the recession) to the tune of 50 billion euros. The Eurogroup rejected an alternative proposed by Yanis Varoufakis, who subsequently resigned as Finance Minister. He advocated bundling public assets “into a central holding company managed as a private entity but under the aegis of the Greek Parliament”. Along with a multi-year investment plan, this would eventually be reshaped into a Development Bank to galvanise investment. As Varoufakis noted this would have allowed Greece “to choose which assets are to be privatised and which not, while guaranteeing a greater impact on debt reduction from the selected privatisations.”
The German-led Eurogroup however insisted on a Treuhand though eventually conceding to it being domiciled in Athens (still de-facto creditor controlled) and extending the public asset sale window from three to 30 years. While the Treuhand is just one of many dimensions needing attention in the context of the crisis in Greece it highlights the politics in austerity. Varoufakis’ proposal made more economic and political sense for Greece but it was less attractive within the Eurogroup and especially in Germany whose politics demands being seen to be tough on Greece.
The ‘austerity delusion’
The IMF’s debt sustainability analysis of June 26th had already underlined that proceeds from privatisation of Greek public assets were far below expected and significantly downsized estimates of future proceeds. On July 14th the IMF updated its analysis and was categorical that Greek “debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far”.
In fact the IMF, also itself a creditor, questions two key assumptions of the Eurozone plan, namely that Greece can maintain primary surpluses of 3.5 per cent of GDP for the next several decades and that it will go from the lowest to among the highest in productivity growth and labor force participation rates in the EU. Yet, the Eurogroup has pressed on, backed by widespread support within and outside the EU.
Austerity as we know it today is and always has been more about the nature of the alignment between political interventions and technocratic neo-liberal economic prescriptions. While there isn’t an agreed definition of austerity—the IMF prefers ‘fiscal consolidation’ —it generally refers to cutting of state or public spending to reduce a state’s debts and deficits.
Reducing the burden of debt or the deficit is not a bad idea but the question is one of timing. As far back as 1937 Keynes maintained, “The boom, not the slump, is the right time for austerity at the Treasury”.
However, with the neo-liberal turn the idea that austerity must be applied during a slump pre-dominated. Nevertheless, the experience of the recent financial crisis as well as further research on austerity and its opposite, stimulus, has forced a reconsideration of these ideas. Indeed, in its 2012 World Economic Outlook, even the IMF acknowledged that the negative effects of fiscal cutbacks have been larger than expected and that the extent to which austerity or fiscal consolidation hurt growth was significantly underestimated.
Greece is a case in point. Its debt-to-GDP ratio is now around 180 per cent.The problem is that austerity policies shrank Greece’s GDP faster than it reduced its debt, which only drove the ratio further upwards. The Nobel Prize-winning economist Paul Krugman recently referred to the ‘austerity delusion’ underlining that “all of the economic research that allegedly supported the austerity push has been discredited”.
Yet the clamour for austerity continues, nurtured in the main by free-market champions who mobilise and invoke a looming spectre of public debt and deficit to sanctify calls for slashing welfare. Though often advanced as value-free pragmatism, austerity is a political ideology aiming to curtail the state’s involvement in the economy by attacking public spending and advocating market expansion.
Poverty—the prize for Portugal’s ‘success’
The contraction of public spending during periods of economic slack can and will eventually reduce the deficit, even if not the debt overhang, but at huge social cost because social welfare transfers and public provisioning are worst affected. Greece is already paying the price—healthcare cuts have driven up infant mortality and infectious diseases, suicide rates have risen, and an estimated 30 per cent of people are now below the poverty line while 17 per cent are unable to meet their daily food needs.
Portugal, which has just exited a three-year Eurogroup ‘bail-out’ deal, is often cited as an austerity ‘success’ case, including by the Pathfinder Foundation in Sri Lanka. Mainly because its current account deficit is now in surplus, the budget deficit is projected to fall below 3 per cent of GDP after 15 years, and the country has experienced four consecutive quarters of growth.
Yet, none of this captures the social cost. In October 2011 Prime Minister Pedro Passos said, “We will only overcome the crisis by becoming poorer”.
The OCED’s 2014 Economic Survey underlines just how right he was: “Portugal has one of the most unequal income distributions in Europe and poverty levels are high. The economic crisis has halted a long-term gradual decline in both inequality and poverty and the number of poor households is rising with children and youths being particularly affected.”
In March 2015, Banco Alimentar, a food bank, reported that some 6,700 households and 18,273 individuals in Lisbon sought food aid; the latter number up from 17,630 in 2012 and 15,182 in 2011. In June The Economist reported that a third of the under-25s in Portugal are out of work and half of all employed graduates under 35 earn less than 900 euros a month.
Emigration is at an all time high since the 1960s, leading to narratives about a ‘lost generation’. Nevertheless, even after all of this, Portugal’s public debt stands at 130 per cent of GDP.
Post-austerity politics in Europe
Much like the Treuhand, what Germany imposed on Greece and Portugal is very much in the spirit of social policy restructuring it imposed on its own population beginning in 2003-04. This has led to increases in labour earnings inequality, weakened the power of trade unions, and brought flexibilisation and profits at the cost of working class precariousness.
A steady chipping away of the welfare state and the disciplining of labour and social policy have accompanied the age of austerity in Europe. A comparative study (June 2015) by the Friedrich Ebert Stiftung of the transformation since 1998 of six major European welfare states—Austria, Denmark, Germany, the Netherlands, Sweden and the United Kingdom—notes that social policy is “subject to stronger individualisation” and is “dominated by a focus on the labour market and re-commodification”. Other concerns include reductions in transfer payments, tightening benefit-related conditionalities but loosening rules on what constitutes a reasonable job, and abandoning goals such as guaranteeing previous living standards through statutory old-age provision.
Lessons for us in Sri Lanka
The experience in Europe underlines that fiscal discipline and cutting public spending is often a cover to realign the social contract in favour of free-markets, empower capital and institutionalise economic precariousness in people’s lives. We must carefully examine calls for fiscal discipline in Sri Lanka. Simplistic comparisons to Greece are misleading and indeed unhelpful in dealing effectively with debt or fiscal policy. Contrary to technocratic claims of pragmatic or value-free decision-making fiscal policy calls for vigorous democratic debate anchored in redistributive concerns.
Finally, it is important to note that austerity in Europe has also precipitated new political formulations and solidarities. This includes the resurgence of left-wing parties in southern Europe and campaigns around issues like a guaranteed income. Although fraught with internal conflicts and even embattled, such as Syriza in Greece at present, these movements embody new political economic perspectives and lessons. It is these that we must draw on to re-politicise and democratise economic policy making in Sri Lanka.