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Austerity, reform, & Greek defiance

- the global debate on the whether or not of Austerity or Stimulus is being played out in Europe
Dickson Igwe. Photo: VINO/File
By Dickson Igwe

The Greek Referendum of Sunday July 5 is a direct challenge to the Greek Consumer on whether or not to accept Austerity, and the ECB, IMF, and Euro Zone prescription, of tight fiscal policy as a condition for bailout funds. If Greece fails to receive financial support from the Troika, this will plunge Greece into an economic crisis that could see its exit from the Euro Zone. Greece could, for the first time, default on debt payments to its creditors.

Now, the fact is the European Establishment believes in the virtue of Austerity. This is evidenced by the rise of the right: one example was the recent and unexpected majority victory in the UK of the Conservative Party. There is increasingly unpopularity of left of center political organisations in a number of northern European countries. The ideas of John Maynard Keynes appear to be in retreat in Europe.

The more affluent countries of Europe possess a “culture of contentment” that states that the free market is the best manager of the economy. The Germans especially possess a self righteousness that looks down upon less affluent countries at the economic periphery of the Euro Zone.

German efficiency, and an export driven economy, is wrongly juxtaposed with countries with a different economic culture that expectedly, are not as efficient and aggressive as the German export model.

However, recent economic history does not support this Culture of Austerity as economic panacea. The Great Recession was brought to an end in 2010 by very aggressive US fiscal interventions and an even more aggressive monetary expansion termed QE.

Europe went along with this Keynesian Idea of government intervention in the economy for a short while. However, Europe soon returned to its Austerity Culture.

What has been the result? The US economy has outperformed all the Western Economies. Europe on the other hand has experienced years of low growth and recession. Europe is contracting economically. Greece and its woes are symbolic of Northern Europe’s love affair with Austerity.

Now, there are economic lessons to be learned from the Greek Economic Depression. The following story reviews opinions by various economists and intellectuals on the Greek matter. Most of these intellectuals assert that Austerity, and Right Wing thinking in the form of Neo Liberalism, in Europe, have put the back of the Greek State to the wall.

The European Political Establishment headed by the German State Establishment, is clearly Austere in its political economy. German ‘belt tightening’ is a love affair with fiscal discipline, and the reduction of deficits and sovereign debt, that may well bring about the destruction of the Greek economy.  

The proceeding narrative draws specifically from an article by the Economist James Galbraith of June 15, 2015 in Social Europe titled: What is Reform? The strange case of Greece and Europe. James Galbraith is Policy Professor at the Lyndon B Johnson School of Public Affairs at the University of Austen in Texas. He is Author of the Book: The End of Normal.  

Economic reform has become the most important term in the economics lexicon, especially when Greece and its problems are brought into focus. Creditors, those who hold Greek debt presently demand three things from Greece: pension reform, labor market reform, and increased privatization of public assets. Creditors do not appear to be in a mood for compromise on the type of reform they believe Greece needs to survive. Neither do the Greeks who believe that they are caught in a trap of humiliation.  

Greece is indeed a modern day “Greek tragedy” where a model of too much Austerity and a lack of investment or stimulus is doing serious long term damage to the economy. Yes, there is a need for greater efficiency of Greek institutions, better fiscal management, and economic reform. However, the northern European love of Austerity may be pushing Greece off the proverbial precipice and out the Euro Zone.

Even the IMF has stated that Greece’s debt is unsustainable, and that Greece should be given decades to pay back its debt as the country restructures and reforms its economy. There is no way Greece will be able to grow its economy under present conditions of Austerity imposed by a European Establishment controlled by the German State. Economic growth is the only way that Greece will be able to pay backs its debts.

Michael Kitson is an Economist from Cambridge who has stated that Greece leaving the Euro Zone would be good or the country long term. He is a singular voice momentarily. Kitson argues that Greece presently, “has no levers to pull to try and generate economic growth.” Instead, Greece is being told to, “put the brake on when what it needs is to press the accelerator.” However, it appears the majority of Greeks might disagree with Kitson. Most Greeks want to stay within the Euro Zone. Kitson believes, however, that Greece will face a long period of stagnation if the country remains in the Euro Zone.

OK. Creditors are demanding a cut in Greece’s state pension of a third to about 350 Euros or $495 a month, from the present 500 Euros or $705. The Greek Government is unwilling to allow its pensioners to suffer.

On the labour market front, Greece’s Creditors have made the Greek Government abolish collective bargaining and reduce the minimum wage. This is the classic Austerity Employment Model:  lessen protections for workers to ensure owners of capital have a low wage cost base, and can fire workers at will.

With regard to privatisation, Creditors are demanding the sale of assets such as sea and air ports, and major utilities such as electricity. This it is believed will build greater competition. It will also give speculators the opportunity to buy these assets on the cheap. 

Greece’s creditors want an increase in Value Added tax. The Greek Government has rightly argued that tax increases in tourism would hurt competitiveness, reduce business activity, and worsen the debt problem.

Economists who sit on the stimulus side of the austerity stimulus measure argue that cuts in pensions, and tax increases, will do nothing to generate economic growth. They are right.

Austerity is the imposition of fiscal and financial pain as economic therapy. Austerity is a medicine that makes the patient worse off. Wage cuts will only see a migration of Greek workers to countries where there is better pay. In fact that is already taking place. A declining population will weaken Greek demand further. 

Austerity is not the answer for Greece.

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