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13 May 2010 Edition

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It's all Greek

Last week saw European governments propose an unprecedented €110 billion bail-out package for Greece, which includes a €1.3 billion contribution from Ireland; the IMF is to back up this bail-out by another €30 billion. With Ireland ranking ahead of Greece and in fact top of European debt tables, speculation is mounting regarding how this bail-out will affect Greece, Ireland and the other European countries who the EU claim are putting the euro at ‘risk’. Here, economist MICHAEL BURKE gives his view.

BOTH GREEK SOCIETY and European financial markets remain in turmoil in the wake of the decision to adopt swingeing austerity measures in Greece as payback for a bail-out. Pension entitlements will now depend on 40 years’ work from 37 years previously. Indirect taxes, mainly paid by the poor, will be increased by between 2 and 10 per cent. 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 tightening will amount to 11 per cent of GDP. This is even worse than the Dublin government’s voluntary slash and burn approach, which amounts to 8.9 per cent of GDP.
The turmoil in the financial markets includes falling stock markets and a weakening of the euro. Most importantly last week’s revelations entail exceptionally high interest rates on government debt for all the countries in the speculative firing line. The authors of the Greek austerity programme – Germany, France, Britain, the ECB and the IMF – have no explanation as to why an austerity package supposedly designed to reassure financial markets has in fact 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 ‘bail-out’ package of €110 billion in loans to Greece and the passing of the austerity legislation by the Greek parliament.
Greece now has long-term interest rates which are 9 per cent higher than those of Germany. This is clearly a crisis point since neither the Greek economy nor the tax revenues that are needed for debt payments are set to grow by 9 per cent more than Germany in each of the next 10 years.  The fact that other countries are travelling down the same road is highlighted by their own excessively high interest rates, with Portuguese taxpayers now obliged to pay 3.7 per cent more per year than Germany and Irish rates at 3 per cent higher.
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 which governments rely on 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. The Dublin government, which adopted ‘slash and burn’ without any great arm-twisting from foreign governments or institutions, is even more hostile to the idea that their own policies have led to wider, not narrower deficits. 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. 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.

Whose Bail-out?
Fiscal austerity measures have only been forced on a small number of European governments (only Dublin volunteered for these measures – perhaps foreign subservience is an old habit that dies hard). By contrast, the majority of EU economies – and others such as the US, Japan and China – did the opposite and adopted fiscal stimulus to restore the economy and the tax revenues which it generates. The EU stimulus measures averaged 4.6 per cent of GDP. By and large, they have been successful, reviving economies and stabilising deficit levels.
Why have the big European powers forced on Greece a policy which is the opposite of their own, successful stimulus measures? The answer lies in the nature of the bail-out that is being offered. The vast sums, which are collected ultimately from the taxpayers of the EU nations, will not be used to revive the Greek economy nor invested to improve its productivity and competitiveness. Instead, the sums are to be used to ensure that Greece carries on paying its debt interest costs, at the price of further borrowing. Little wonder that there is scepticism in financial markets that this is sustainable.
No Greek pensioner will be better off as a result of the package. On the contrary, they will be impoverished. The same is true of Greek public sector workers, and many in the private sector, as well as anyone who spends money on basic goods. As a result, more Greek businesses will go broke.
The targeted beneficiaries of the bail-out are the holders of Greek Government debt. These are mainly German, French, British and US banks. In that way, with money from taxpayers being used to bail out banks holding Greek debt, the bail-out is like an international version of NAMA. The role of Irish property speculators and their bankers is played by the Greek shipping owners, the military and the government.  The ultra-wealthy in Greece live tax-exempt lives. Shipping is entirely tax exempt, and the majority of the hidden overspending by successive Greek governments was on the military. A programme of reasonable taxation on the wealthy and bringing Greek military spending down to the EU norm would reduce the deficit overnight close to 3 per cent of GDP.
The bail-out is a bail-out only for the bondholders. Worse, the Greek economy has been bound hand and foot and then improved performance is demanded.  Even the speculators and the ratings agencies can see this is impossible, and ever-higher interest rates simply reflect the rising risk of a debt default.  It is imperative that the real culprits pick up the tab: the bondholders, the speculators and the wealthy (and in Greece’s case, the military). 

More of Michael’s work can be found on www.progressive-economy.ie 

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