Greece stands up
- By Heiko Khoo & Michael Roberts
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E-mail China.org.cn, July 9, 2015
Even the IMF now recognizes that it got its forecasts for a Greek recovery hopelessly wrong. It reckons that Greece's creditors must write off debt equivalent to at least 30 percent of Greek GDP to even begin to be able to sustain debt servicing without default.
The Greek capitalist economy is too weak, inefficient and unproductive to grow fast enough to pay back its debts. Wages, public sector spending and pensions have been cut savagely. Plans to improve tax collection and end tax avoidance and evasion are being put in place, but by IMF estimates, tax revenues will still not be high enough.
If the Syriza government is forced into a new bailout package to service its debt, the Alice in Wonderland scenario of taking out more loans to pay for previous ones will continue -- a true Ponzi pyramid scheme. The more austerity and cuts to living standards are applied, the more difficult it will be for Greek capitalism to grow.
Regardless of whether some sort of deal with the troika is cobbled together for now or whether a Grexit (a Greek exit from the euro currency union) is negotiated instead, the Greek economy needs to grow. Only growth can make any public or private debt burden disappear. For example, the United States' public sector debt is huge at nearly 100 percent of GDP, but the U.S. can service that debt easily because it has nominal GDP growth of 4 percent a year, while the interest costs on its debt are very low at just 3 percent a year. Because growth is higher than the interest rate on its debt, the U.S. government can run a tax revenue versus spending deficit of 1 percent of GDP a year (before interest), and its debt ratio will still stay stable, though it will not fall.
Greece, on the other hand, had interest costs of over 4 percent on its debt in 2011 and nominal GDP growth of -5 percent a year, so it needed a government surplus of 9 percent of GDP just to keep its debt from rising. Even the small debt restructuring of the second bailout program in 2012 did not stop the rise in the debt ratio. It is still rising.
Everything depends on restoring much faster growth. That requires increasing investment, new jobs, rising incomes, higher tax revenues and the subsequent ability to pay debt. How can the Greek economy be made to grow? There are three possible economic policy solutions.
The first is the neoliberal solution demanded by the troika. This involves cutting back the public sector and its costs, keeping wages down and making pensioners and others pay more. This aims to raise the profitability of Greek capital and, with extra foreign investment, restore the economy. It is hoped that the eurozone economy will start to grow strongly and so help Greece. So far, this policy solution has been a failure. Profitability only improved marginally and eurozone economic growth remains dismal.
The second is a Keynesian solution which entails boosting public spending to increase demand, cancelling part of the government debt, and leaving the euro to introduce a new currency that is devalued to make Greek industry competitive in world markets. This solution has been rejected by the troika, although the IMF has called for debt relief at the expense of the euro group (i.e., eurozone taxpayers). A Keynesian solution assumes that Greek capital can be revived with a lower currency rate and that more public spending will increase demand without further lowering profitability. But the profitability of capital is the key to recovery under capitalism. Already, over 40 percent of Greek banks' loans to industry are not being serviced. Rapidly rising inflation will follow any devaluation and will only raise profitability by eating into the real incomes of the majority as wages fail to match inflation.
Both the troika's neoliberal solution and the Keynesian solution depend on a long-term eurozone economic recovery. In the meantime, a whole generation of Greeks will have been made destitute and many others will emigrate. Greek labour will still be poorer on average in 2022 than it was in 2008.
The third possible solution is a socialist one which recognizes that Greek capitalism cannot recover enough to restore living standards for the majority. This solution calls for public ownership and control of Greek banks and major companies to direct them to drive investment, spur growth and increase efficiency.
The no vote in Greece will encourage others in Europe to throw out their governments. Spain, Italy and Portugal are the places to watch next.
Heiko Khoo is a columnist with China.org.cn. For more information please visit: http://china.org.cn/opinion/heikokhoo.htm
Michael Roberts is a London based Marxist economist. He published the "The Great Recession" in 2008 and "Essays on Inequality" in 2014
Opinion articles reflect the views of their authors, not necessarily those of China.org.cn
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